But was she right about ‘popular capitalism‘, the intuitively plausible idea formed by Tories in heady days of the Eighties that held that spreading share-ownership via the privatisation of publicly owned firms and industries would give ordinary Brits ‘a stake in the market’ and, in so doing, would push them to vote Conservative instead of Labour?

The answer, according to some intriguing research I heard about this week during a trip to the States, suggests she might have been.

Suggested reading

Why the Iron Lady is an icon for our times

By Ian Birrell

As far as I’m aware, Lady Thatcher had no personal connection with Princeton, one of the USA’s Ivy League universities, although one of the best recent books on her was written by Sir David Cannadine, a British historian and Princeton faculty member.

But it was here that I attended a colloquium exactly 40 years to the day after Thatcher first entered Downing Street as Prime Minister, and where I heard Yotam Margalit, from Tel Aviv University, present some research he’d conducted with Moses Shayo from the Hebrew University of Jerusalem.

Margalit wasn’t talking about Thatcher, but the findings of his research would, I’m sure, have pleased the Iron Lady no end. As a trained chemist, Thatcher would especially have liked the fact that they resulted not from desk research, but from an experiment.

The experiment was a complex one, with different ‘treatments’ applied to subgroups of the sample of 1,500 English participants. In essence, however, it involved giving the participants, most of whom had never invested in the stock market, £50 to spend over the course of two months on buying and selling stocks on a web-based platform.

In the weeks before and afterwards they, along with a control group, were also asked a range of apparently unrelated questions designed to tap into their underlying social and political attitudes, as well as some more specific, policy-related questions on tax, spending, and regulation.

The results? The people who actually got to trade stocks, they found, ‘shifted rightward’ in their social-economic values. This influenced their attitudes on economic fairness, inequality and redistribution, the role of luck in economic success. They also found that ‘exposure to the market increased subjects’ confidence in the ability of regular people to successfully invest in the market, as well as their own inclination to invest’.

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Let's junk our electoral system

By Tim Bale

Although there was no shift in participants’ views on policy, such as whether government should provide either more or less generous benefits to the jobless, they did become less sympathetic to the idea of taxing investment gains and regulating the market. They also became much keener on the idea that people be allowed to invest some of their national insurance contributions in the stock market, even if that that meant more meagre retirement funds for those whose gambles didn’t pay off.

Moreover, and in some ways most fascinatingly of all, this ‘rightward shift in social-economic values’ occurred among both left and right-wing voters but was ‘more pronounced among those on the left’. They also found ‘little evidence that the change in attitudes was determined by how well participants’ investments performed’. Amazingly, Margalit and Shayo discovered that the effects on attitudes that came about by playing the stock market were still there when they followed up participants a year later.

These results are striking but they also accord with research based on the science of elections gathered during the late 1980s, which suggests a relationship between share ownership and increased Conservative voting and a similar tendency among the millions who bought shares in the utilities privatised by Thatcher.

Even if those correlations weren’t spurious, popular capitalism (and what Left-wingers consider its evil twin, ‘the property owning democracy’ kickstarted through council house sales), could do the trick forever.

Thatcher herself was unceremoniously dumped by her parliamentary party when the economy tanked soon after her third successive victory in 1987, at which point it had become clear she and many of her flagship policies had become an electoral liability. And although her party managed to pull off a surprise win in 1992, it got its comeuppance in 1997 and, frankly, has struggled ever since.

Nevertheless, leaving time and chance aside, and incorporating a little bit of economic history, this latest research suggests that it wasn’t so much that providing people with the opportunity to own shares failed to shift them to the Right, but that it involved far too few people to pay off long-term, at least electorally.

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How Thatcherism produced Corbynism

By John Gray

It’s estimated that around three million individuals owned shares in 1979, and by 1987 the figure had risen to over eight million. But many of the smaller investors were in it for immediate short-term gain, while relatively few were so bitten by the bug that buying shares in privatised companies led them to expand their portfolios to include other asset classes.

In any case, eight million people was only ever a small proportion of the total population. Ownership of UK listed shares by individuals fell precipitately in the 60s, 70s, and, yes, the 80s too, and now stands at around 12%, which incidentally is around the European average. Establishing the proportion of the UK’s population that owns shares individually as opposed to through, say, pension funds, is far harder. Apparently, nearly nine million people in the UK hold stocks and shares ISAs, which constitutes less than one in five of us – a figure which accords neatly with the 19% estimate quoted in a 2015 ResPublica report.

Even if Margalit and Shayo are right, then, capitalism would need to be a lot more popular – in the literal sense of more people owning more shares – to make as big a difference to the nation’s politics and attitudes as Thatcher firmly believed it would.

Sceptics will argue that their findings were produced ‘in the lab’, and that things would be very different in the real world. They may say that in reality, people playing with their own hard-earned cash would lead to devastating losses in their standard of living as well as their faith in financial markets – the very thing the researchers think may (along with sheer familiarity) be driving the attitude shifts they observe.

But that prompts a further question. Would anything that contributed to distrust of financial markets have opposite effects to those that the research discussed here discovered?

Could another crash, or simply a gnawing feeling that the markets are rigged in favour of big banks and crony capitalists, generate support for greater regulation, a more comprehensive safety net, and the idea that failure or success is as much a product of society as it is of individual effort and responsibility? Politicians of every stripe would do well to bear that in mind.

“I was absolutely astonished when I discovered there was a proposal to put into law the ability of shareholders to stop these excessive payments… I thought this was a power shareholders had always had”

That’s what Jacob Rees-Mogg said when I asked him about fat cat pay packages. “What is the point of owning the business,” he continued, “if you can’t even vote down the remuneration committee’s answers?” It’s a good question, but I think it misses the point.

Last year, the British Prime Minister referred to excessive executive pay as the “unacceptable face of capitalism”. Her manifesto, a few months earlier, had pledged to change that by legislating “to make executive pay packages subject to strict annual votes by shareholders”.

It’s easy to see why legislating to change behaviour – by giving the owners of capital the absolute right to vote against, for example, executive pay packages – looks attractive. Certainly, the current non-binding “say on pay” requirements – of which the UK was an early adopter, with the US following suit in 2011 –  are a damp-squib.

Research by Stanford Graduate School of Business found that, overall, “granting shareholders the right to vote on executive compensation contracts has a fairly limited impact on pay”, which helps explain why pay levels haven’t been shifted in countries that have adopted it.[1. David Larcker and Brian Tayan, ‘Say on Pay research spotlight’, Stanford Graduate School of Business, 2016]

There is the odd case – like that of the construction company Crest Nicholson –where, despite shareholders voting against a pay package, the “advisory” nature of the vote has allowed the business to push ahead regardless. But, more commonly, where a majority of shareholders has voted no, action has been taken. The real problem is that shareholders are too often asleep at the wheel, and executives disinclined to moderate their behaviour.

So, while it’s disappointing that the Prime Minster has backtracked on her manifesto promise, the real question is: why do capitalists need legislation to make them do the right thing?

The writing is on the wall, capitalists need to read it

My colleague. Henry Olson. has pointed out that the experts who were blindsided by Brexit, Trump and the wider rise of populism across the West could have foreseen the upheaval. The data was there, they just weren’t reading it. Capitalists should take note.

• Polling this month found less than half of Americans, 48%, trust business; in the UK it’s even lower at 43% – and on both sides of the Atlantic, that’s a decrease from 2017.[2. .‘Global Trust Index’, Edelman, 2018]
• Last year, YouGov polling for UnHerd found that three quarters of Britons and more than 60% of Americans believe big businesses have dodged taxes, damaged the environment or bought special favours from politicians.
• In 2016, just 24% of people in the UK and 38% of people in America trust business leaders to tell the truth.[3. .‘Trust in business leaders’, Ipsos Global Trends, 2016]

That’s pretty damning evidence that the people – those pesky individuals who sent political shockwaves reverberating through the West – are unhappy with corporate behaviour. In Britain, only those aged 65 or above are more likely to describe themselves as capitalist than socialist.[4. .‘British people keener on socialism than capitalism’, YouGov, 23 February 2016]

A hard-left Corbyn government, or socialist-styled Bernie Sanders administration, is no empty threat, it’s a very real possibility. Corbyn was a whisker away from winning last year’s UK general election, and many people, including Donald Trump’s own pollster, believe that Sanders could have won in 2016 had he been the Democratic candidate. The alternative to shareholders and executives putting their own house in order – or, to you and me, acting with integrity – is someone else doing it for them… and with a heavily anti-business bias.

Shareholders need to act

Rebuilding trust in business is, of course, going to take more than curtailing excessive executive pay – as important as that is – and at the start of 2018 we’re seeing encouraging signs that investors might just be getting it.

Larry Fink, the head of the world’s biggest fund manager BlackRock, used his annual New Year letter to CEOs to demand better behaviour.

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate. Without a sense of purpose, no company, either public or private, can achieve its full potential.”

BlackRock’s responsibility to its investors, Fink states, “goes beyond casting proxy votes at annual meetings”, it requires active engagement with companies. Warm words will not make the difference, but in beefing up their “investment stewardship’” team BlackRock is putting its money where its mouth is.

Another encouraging example is the shareholder resolutions filed at Facebook and Twitter this month by $200 billion New York State Common Retirement Fund and activist investor Arjuna Capital. The resolutions are aimed at forcing the tech giants to tackle abuse of their platforms. The shareholders want a detailed examination of the scope of abuse – including sexual harassment, hate speech and fake news – and an assessment of how the platforms are responding.

They also want the report to assess the financial and operational risk of “content management controversies”; which is a question other investors are likely to be interested in.

The collapse of UK facilities management and construction company, Carillion, shone the spotlight once again on fat cat corporates and their inadequate investor oversight. The Prime Minister is back on her soapbox, writing in The Guardian that: “for the first time, businesses will have to demonstrate that they have taken into account the long-term consequences of their decisions”. There’s no detail, and the Prime Minister’s track record is hardly encouraging, but it sounds ominous.

It’s time for the capitalists to get a grip and start rebuilding trust in business. That means active engagement with the companies they invest in, collective action and, ultimately, a willingness to act with their feet. The alternative, after all, is a whole lot worse.

Corporate buyback – in which companies repurchase their own shares, overwhelmingly on the open market – has been rampant for decades, but was boosted after the financial crash by the availability of cheap credit. And while share repurchases fell 20% last year, President Trump’s tax cuts may give buyback renewed impetus. Just under half of companies who could benefit from the plan by repatriating cash stored abroad say they would use the windfall for share repurchases (buyback was the second most popular option after paying down debt).[1. Jeff Cox, ‘Companies have big places for trillions in overseas cash – if tax reform ever happens’, CNBC, 13 July 2017] At the heart of the bullish stock-market is the constant stream of buyback funds.

Why do companies want to buy their own shares? Because fewer shares means higher earnings per share (EPS) – the magical measure of corporate success that Wall Street watches. The problem is that it’s all smoke and mirrors, or, as others have dubbed it, “financial engineering”. It is distorting corporate behaviour in ways that are profoundly damaging to America’s long-term economic health. Buyback is the epitome of short-termism, fuelled by corporate greed.

“Value extraction over value creation”

Between World War II and the late 1970s business focus was largely on value creation – earnings were retained to be reinvested in productive capacity; in physical and human capital. Yes, the aim was to drive further profits, but through real, sustainable growth.

Then, as economist William Lazonick has argued, in the late seventies the “retain-and-reinvest approach” gave way to a “downsize-and-distribute regime”, or, to put it even more starkly, “value extraction over value creation”.[2. William Lazonick, ‘Profits Without Prosperity’, Harvard Business Review, September 2014]

This was in part the result of a new business management mantra: ‘shareholder value maximisation’, and coincided, unsurprisingly, with large increases in stock-based executive pay (tying CEO interests more closely to those of some shareholders, the ones looking for short-term gains). In 2012, pay packages among the 500 highest paid executives in US public companies averaged over $30 million, with more than 80% of that linked to stocks and shares.[3. Ibid] Increasing share value became the overriding focus of corporate America.

One study published in 2006, and based on a survey and interviews with chief financial officers, shows this perfectly. The majority of companies would rather sacrifice longer-term value than miss short-term earnings targets. 80%, for example, would cut discretionary spend such as R&D and maintenance to meet an earnings target, and more than half would defer valuable long-run projects for that same reason.[4. John Graham, Campbell Harvey and Shiva Rajgopal, ‘Value destruction and financial reporting decisions’, Financial Analysts Journal, 2006]

Wall Street’s hunger for higher and higher quarterly EPS postings had become the priority.

Legalising buyback has real-world costs

It was in 1982 that the Securities and Exchange Commission (SEC) made buyback legal – by amending the 1934 Securities and Exchange Act to provide a “safe harbor” for companies to repurchase shares. This deregulatory move, as Lazonick puts it:

“In essence…legalized stock market manipulation through open-market repurchases.”

Unbelievably, executives can now benefit from ‘insider-trading’. While SEC’s 1982 rule set some parameters for repurchases, disclosing daily buyback activity was not one of them. Company executives can continue to trade based on buyback intelligence unknown to the outside world. Another example of a system rigged in favour of a corporate elite.

Big business has not been shy in making the most of the SEC’s deregulatory gift. Between 2004 and 2013, Exxon Mobil, for example, spent over $200 billion on buybacks, Microsoft and IBM both spent over $100 billion.[5. .‘The repurchase revolution’, Economist, 12 September 2014] Apple are undertaking a $300 billion share repurchasing and dividend scheme.[6. Gina Hall, ‘Apple to sell billions of dollars in bonds to fund share buybacks, dividends’, Silicon Valley Business Journal, 6 November 2017] In the fourth quarter of 2015, more than a quarter of S&P 500 companies bought enough of their own shares to push their EPS up by at least 4% on the previous year.[7. Lucinda Shen, ‘Here’s what’s keeping the stock market up’, Fortune, 25 April 2016]

Imagine the difference that money could have made.

Think for a minute what the $2 trillion spent by S&P 500 companies on buyback during 2010-2015 could have been spent on. Think about the risky, but high-potential projects that weren’t funded. The innovation missed. The skills investment foregone. The jobs that weren’t created. The pay rises that ordinary workers never received (despite soaring executive pay).

Prioritising short-term earnings manipulation over capital investment has big real-world costs – and at a time when global competition demands more, not less, investment in innovation and skills.

Buyback isn’t actually good for shareholders (at least not long-run investors)

And to cap it off, buyback isn’t even working that well for shareholders. McKinsey found that while buyback may boost earnings on paper – back to the smoke and mirrors – it doesn’t improve returns. Based on a sample of 250 non-financial S&P 500 companies McKinsey analysts found no link between share repurchase intensity and total return to shareholders.[7. Obi Ezekoye, Tim Koller, and Ankit Mittal, ‘How share repurchases boost earnings without improving returns’, McKinsey, April 2016] And just three of the ten largest share repurchasers since 2003 have outperformed the S&P 500 Index.[8. William Lazonick, ‘Profits Without Prosperity’, Harvard Business Review, September 2014]

In a Harvard Business Review essay last year debunking the ‘shareholder value maximisation’ myth, Joseph Bower and Lynn Paine point out that there’s no single shareholder, there’s a bunch of investors with different objectives – it’s just some shout the louder than others.[9. Joseph Bower and Lynn Paine, ‘The error at the heart of corporate leadership’, Harvard Business Review, May-June 2017]

The ‘activist’ view of value creation, they argue, “is more accurately described as value transfer… Nothing has been created.” It leads to “further wealth flowing to sophisticated investors at the expense of ordinary investors and everyone else.” And they too are concerned by the perverse incentives created:

“Rigid adherence to the model by companies uniformly across the economy could easily result in even more pressure for current earnings, less investment in R&D and in people, fewer transformational strategies and innovative business models, and further wealth flowing to sophisticated investors at the expense of ordinary investors and everyone else.”

The temptation to chase the quick buck is trumping real investment – and the eye-watering level of corporate buyback schemes is one of the biggest symptoms. Wall Street hasn’t learnt delayed gratification, so nor has corporate America. But a stock market driven not by value creation through long-term investment, but by financial engineering is fickle. Those short-termist investors and executives should remember that 2007 recorded the highest spend on stock buybacks at $721 billion. And we all know what happened next.

Excessive executive pay packages in particular have become totemic symbols of everything that is wrong with capitalism – greedy fat cats living the high life on self-set pay while ordinary workers struggle on stagnating wages. Since the financial crash, which exposed how many capitalists had been asleep at the wheel, shareholders have largely woken up to the threat that irresponsible business behaviour poses to the free market system. At the beginning of this year, the $6 trillion investment firm BlackRock wrote to every company in the FTSE 350 arguing that growth in executive pay awards and pensions, should not outstrip that of ordinary employees.[2. Chris Flood, ‘BlackRock demands end to excessive executive pay’, Financial Times, 15 January 2017]

But if capitalism is to rehabilitate its reputation, companies need to continue to demonstrate they can behave responsibly. Investors need to use their power to drive positive change, which is where the concept of impact investment comes in. That is, investment that delivers long-term returns by investing in companies that provide social and environmental benefits.

Private investment, public good

“Turn a profit not a blind eye” would be an aspirational tagline for capitalism. Instead, it’s the motto of Abundance, a peer-to-peer investment firm specialising in green projects, ranging from a solar farm in Swindon to a geothermal power plant in Cornwall. Investing in private equity funds that focus on “a better world” – to use Abundance’s phrase – is the driving principle of impact investment.

Project Snowball LLP, jointly founded by two charitable trusts, wants to establish impact investment as a mainstream investment option. Hetan Shah, Chair of Trustees at Friends Provident Foundation – a recent Snowball investor – explains that “Snowball will apply a social and environmental impact lens to all of its investment analysis, reporting and decision making.” The fund, Hetan says, is enabling investment in “microfinance in the developing world, housing for the homeless in the UK, and UK renewable energy projects that are co-operatively owned by the local community.” Without capital investment like Snowball’s, these types of projects wouldn’t exist.

Ethical investing 2.0

It may be harder to measure the additionality delivered by investors in public companies – after an initial public offering, the sale of shares is not creating new funds in the way Abundance or Snowball are. But ethical investment still has a role to play.

EQ Investors, a wealth management firm with B-Corp certification (meaning they meet high social and environmental standards), for example, offers investors a ‘Positive Impact Portfolio.’ Damien Lardoux, who runs the portfolio, tells me “the clear objective is to invest in companies with high quality products and services that are tackling social and environmental issues.”

Ethical investment has a long history, but has traditionally focused on screening-out or disinvesting ‘unethical’ companies, like tobacco and fossil fuels. The EQ model is about pro-actively investing in companies that deliver a net positive impact on society. Lardoux describes it as “ethical investing 2.0” and it’s increasingly popular. In the last two years, investment in the portfolio has doubled.

EQ, which provides quarterly client impact reports, use the UN Sustainable Development Goals as a measurement framework. Lardoux believes that as millennials make up an increasing proportion of investors, publishing impact data – not just financial data – will be the norm.

WHEB asset management, another B-Corp, is similarly mission-focused, investing in companies tackling global imperatives like climate change and resource scarcity.  WHEB has an ‘impact calculator’ on its website that measures the positive effect of an investment against five environmental indicators. A £10,000 investment, for example, is associated with providing 300,000 litres of drinking water and avoiding 16 tonnes of CO2 emissions. George Latham, managing partner at the fund, insists that “investing in well-run, high-quality companies in strongly growing markets” makes commercial sense.

But while investing in ‘impact’ companies is an ethical thing to do, it doesn’t necessarily create additional value. That’s where investor activism comes in. Take, for example, a renewables firm. Their products are creating a positive impact, reducing dependency on fossil fuels. But internally, they may treat their workers poorly or behave wastefully in their supply chain. Investors who use their clout to change those practices are creating additional impact. That’s what WHEB and EQ Investors tell me they do, and it’s the sort of ‘activism’ shareholders should be engaged in as a matter of routine.

When the Investment Association publish their register this month, a renewed focus on shareholder activism will follow. It’s time that that conversation moves beyond curtailing C-suite pay and onto initiatives that can make a more permanent, well, impact.