Do Corporations Increase Inequality?

52 Pages Posted: 2 Dec 2015 Last revised: 9 Sep 2016

See all articles by Ewan McGaughey

Ewan McGaughey

School of Law, King's College, London; Centre for Business Research, University of Cambridge; University of California, Berkeley - Berkeley Comparative Equality & Anti-Discrimination Law Study Group

Date Written: November 30, 2015

Abstract

Do corporations increase inequality? Rising inequality of income and wealth has recently been linked to corporate governance, but closer analysis is still developing. This article provides a conceptual grammar to understand the problem. Which ‘significantly distributive rules’ affect the income of executives and directors, employees, retirement savers and shareholding intermediaries the most? Evidence of legal change since 1900, compared with changes in the top 1% of income earners, shows remarkably common outcomes across three major ‘varieties’ of jurisdiction: the UK, Germany and the US. First, executive pay began rising, not just when shareholders generally lost a binding ‘say on pay’ in the 1970s, but when institutional shareholders could monopolise pay decisions. Second, inequality was driven dramatically by the loss of voice at work for employees and their unions from 1980, but far more in so called ‘single channel’ systems of labour-management relations. Third, over the late 20th century asset managers and banks came to appropriate shareholder voting rights with ‘other people’s money’ (mostly from retirement savings). They have been able to use those votes to make corporations buy their own financial products, subsidising financial intermediaries’ share of GDP, and inflating the income of the financial sector. This means corporations are probably the most important ‘pre-tax’ cause of increasing inequality. However, with small but careful reforms, corporations could become institutions that promote economic stability and social justice.

Keywords: Inequality, corporations, corporate governance, labour rights, institutional investors, pensions, executive pay, say on pay, democracy

JEL Classification: D63, G30, G38, J26, K22, K30, K31, M14

Suggested Citation

McGaughey, Ewan, Do Corporations Increase Inequality? (November 30, 2015). TLI Think! Paper 32/2016. Available at SSRN: https://ssrn.com/abstract=2697188 or http://dx.doi.org/10.2139/ssrn.2697188

Ewan McGaughey (Contact Author)

School of Law, King's College, London; Centre for Business Research, University of Cambridge ( email )

Somerset House East Wing
Strand
London, WC2R 2LS
United Kingdom

HOME PAGE: http://kclpure.kcl.ac.uk/portal/ewan.mcgaughey.html

University of California, Berkeley - Berkeley Comparative Equality & Anti-Discrimination Law Study Group

Boalt Hall
Berkeley, CA 94720-7200
United States

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