What’s the purpose of purpose? Will the focus on corporate purpose deliver real change in the way companies behave?

For all the active discussions about purpose in the context of business, and all the force with which the concept is advocated by its champions, there is a lack of clarity at the heart of the debate. Indeed, too many seem to be seeking deliberately to obscure the fact that there are at least two separate discussions going on. If purpose is actually to deliver on its promise — in the terms used by this blog, fairer business and society — clarity is needed.

Clarity is lacking, though. What’s worse, there seems real disagreement over what a corporate purpose is, and there is even disagreement about what the debate on corporate purpose is all about.

At a recent London School of Economics Systemic Risk Centre event on Sustainability and Systemic Risk, I asked law professor David Kershaw what the distinction is between the new agenda of purpose and the former company law model of articles of association including objects clauses which in effect bar companies from acting ultra vires, beyond their stated scope. This objects clause approach was swept away by the Companies Act 2006 (though it had been rendered largely obsolete prior to this by such clauses being drafted incredibly broadly, giving boards in effect almost unlimited freedom). David highlighted that objects clauses set out what the company was there to do, and purpose statements are about how the company does it.

This idea of purpose as the how is to me an attractive one. But there is active disagreement over which of Rudyard Kipling’s six honest serving men purpose might represent.

For example, Douglas Lamont, the CEO of Innocent Drinks, speaking at the British Academy’s Future of the Corporation Purpose Summit offered his own seductively simple outline of how those serving men operate in framing corporate activity:

“Purpose is the why
Vision is the what
Values is the how”

And Patrick Dunne, former 3i executive, in his magisterial but still highly practical new tome Boards (produced by the excellent Governance Publishing) asserts a further version of this (ironically perhaps, discussed in the ‘Process’ segment of a book he divides into 3 sections, ‘Purpose’, ‘People’ and ‘Process’):

“Vision: What we want to see happen
Purpose: Our contribution to making that vision a reality
Mission: A description of what we actually do
Strategy: How are we going to make it happen”

“Deciding what they [these four plus also brand and culture] should be is one of the most fundamental things for a board and management team to determine,” Dunne says.

The confusion is still worse in some cases, where purpose appears to fulfil multiple roles at once. Take one of the most quoted statements on purpose, Larry Fink of Blackrock’s 2019 letter to investee company CEOs. This shifts from one perspective on purpose to another from sentence to sentence: “Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being — what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.” Here, purpose is simultaneously both ‘what’ and ‘why’ it seems. 

But the disagreement goes deeper. It is not just about what purpose is and what it means, but about at what level corporate purpose is being discussed. One of the challenges with business purpose is that there are two very separate conversations going on, and rarely is a clear distinction drawn between them. Indeed, some of the leading proponents of the question of purpose elide the distinction almost entirely. One conversation is about a business’s purpose — what is the driving force for an individual company’s operations — and the other about the purpose of business — what is the overarching role of business corporations in economic life and society as a whole. For example, while the bulk of the focus on purpose in the British Academy’s work on the Future of the Corporation is about individual companies, it does not shy away from brassily huge assertions such as “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems”. 

This wide-reaching version of the corporate purpose debate is well illustrated by an article and blog from a pair of law professors from Rutgers, Can a Broader Corporate Purpose Redress Inequality? The Stakeholder Approach Chimera. This sees the debate about purpose purely in the sense of the overall purpose of corporations generally, and seems to take for granted that currently US companies can only consider narrow shareholder interest (a view disputed in Accountable Capitalism). And it views a switch from this shareholder-centricity to a stakeholder model as risky because it is likely further to entrench corporate management: “a stakeholder approach is unlikely to achieve meaningful redistribution of power and resources to weaker constituents and would likely work in the opposite direction. We suggest that a stakeholder approach gives corporate executives both a sword and a shield with which to preserve their advantageous status quo.”

The authors take their cynicism about the Business Roundtable purported restatement of corporate purpose beyond that of the major US investment institutions represented by the Council of Institutional Investors (see The limited responsibility company), and argue that this is not just entrenchment of current power structures but an active distraction from addressing fundamental problems in society: “in our view the entire debate over corporate purpose has so far revolved around the wrong question: it has centered on whether directors are disproportionately focused on shareholders’ interests, neglecting the more important questions of why are weaker constituencies faring so bad in modern-day American capitalism and what can actually be done to elevate their interests”. They believe that these issues would be better solved with more direct interventions, such as changes to labour, tax and competition laws.

This is certainly a worthy debate, but I think focusing the discussion on corporate purpose with regard to the individual company and what it is aiming to do is both more practical and more immediately needed. It should help individual companies prosper and succeed. That certainly seems to be the intent of the FRC in bringing purpose very clearly into the board’s remit in the Corporate Governance Code. Principle B states “The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.” It does not explain much of what it means by this, other than framing it in terms of long-term success and the business in the context of its stakeholders, and the need to ensure that “policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy”, and that executive pay is also so aligned.

According to David Kershaw and his LSE colleague Edmund Schuster, this introduction of purpose in the Corporate Governance Code is a potential watershed moment, a “purposive transformation of company law”. They suggest this even while noting the FRC’s omission of a definition of purpose, and so the scope for misunderstanding. Again, their focus is on the broader horizon of the overall purpose of the corporation, and they argue that the shareholder-friendly nature of UK company law will frustrate the intent of purpose. They appear to have little trust in the concept of enlightened shareholder value as embodied in s172 of the Companies Act, and the view that a focus on stakeholder interests facilitates long-term value creation for all, including shareholders. Instead they argue that company boards and management will only feel empowered fully to reflect their stated purposes if they have a ‘zone of insulation’ from the usual pressures of the financial markets. In effect, they disbelieve the fine words of institutional investors and think that in practice they will simply favour their own interests as shareholders.

This, though, is surely a chicken and egg situation: shareholders supportive of purpose are drawn to companies with clear, publicly stated and lived purposes, just as much as companies with supportive shareholders are able to develop and assert a purposeful approach. I have argued elsewhere that one reason Unilever was able to survive the bid approach from aggressively managed Kraft-Heinz was because it had previously set out its stall as a long-term business. When Paul Polman started as CEO one of his first acts was to abandon quarterly reporting, encouraging a longer term mindset among shareholders. It put off some investors but encouraged others, meaning the shareholder base was longer term when the hostile approach came. Given the subsequent near-implosion of Kraft Heinz as its zero budgeting model reached its natural come-uppance (as all under-investment will in time), those longer-term shareholders have served themselves — and their clients — well. They also acted in a way that served the interests of Unilever’s employees, customers and suppliers.

Despite the professors’ mistrust, it would seem that institutional shareholders genuinely are ready to embrace purpose, if they believe that managements are themselves committed to them. My friends at SquareWell recently surveyed institutions on the topic, receiving responses from firms with a total of $22 trillion in assets. Not only are these institutions supportive of purpose, more than three-quarters are expecting companies to have set out their purpose:

Squarewell purpose Screenshot
SquareWell: Making Corporate Purpose Tangible

Furthermore, fully 86% expect some sort of declaration that the company has successfully fulfilled its purpose over a relevant reporting period. And they expect purpose to be concrete enough to be measurable: some 75% of these investors believe that KPIs should be set and disclosed with regard to the delivery of purpose, and 59% believe that those KPIs should affect executive pay. Personally I think that this risks attempting to measure the unmeasurable, and certainly it is a further example of the investment community expecting companies to do things they themselves are not yet doing, given that only 22% of the sample have actually themselves incorporated purpose issues into their evaluations of ESG.

Yet in practice uptake of purpose in a formal way has been limited. The SquareWell team report: “In the French market where companies have the opportunity to amend their bylaws to define their ‘raison d’être’, which requires shareholder approval, less than ten companies have taken the leap. Most companies are reluctant as they fear creating new legal risks while they are not convinced of the benefits. The ones which have done so received very high level of shareholder support though.” My informal discussions with investors also indicate a nervousness about the lawyering that is likely to be involved in any incorporation of purpose into bylaws or articles of association, which might risk making purpose meaningless; however, 41% of SquareWell’s surveyed investors believe that the purpose should be so enshrined (though this is fewer than those believing that it is more appropriate for purpose to be asserted through a regular statement in the annual report or otherwise by the board — 55% and 45% respectively).

One example of a French company that has adopted purpose formally was Danone, which at its AGM in June 2020 won no less than 99.4% approval for such a move. Its declared purpose does not seem to have been narrowly lawyered to the extent it is meaningless; indeed, it is general and broad: “The purpose of the Company is to bring health through food to as many people as possible.” Under the société à mission model, the corporate form that Danone has switched to, the company is held to account for delivering on this purpose through the oversight of a special committee, independent from the board (though the rules allow board directors also to be members). This committee’s role is to monitor delivery against the purpose, and to produce an annual report to that effect.

Elsewhere, much has been made by a few commentators of recent IPOs by some B Corps, a corporate model that puts stakeholder interests before those of shareholders. This, they suggest, is a sign of purpose potentially driving changes to business behaviour. Notable amongst these has been insurance business Lemonade, which listed on NYSE at the start of July. “As a public benefit corporation, our focus on a specific public benefit purpose and producing a positive effect for society may negatively impact our financial performance,” states the IPO prospectus in its lengthy Risk Factors section, apparently highlighting just such change. However, sharp insurance industry commentators Oxbow have highlighted just how little of Lemonade’s money actually ends up heading towards its purported purpose: “anything left over is donated to charity in the annual ‘giveback’. This giveback has been a major emphasis in the company’s marketing, but in reality, it’s a very small proportion of actual spending.” So perhaps the legal drafting of risks is just another element of the breezy sales style of the rest of the prospectus, which at times shades into pomposity. Certainly, some investors believe shareholders will make real money from the company, as the share price leapt nearly threefold on debut and even after a drift downwards values the company at some $4 billion. The prospectus reports total 2019 revenues of just $67 million, and a loss of more than $100 million; ‘giveback’ was around $600,000.

A change in business behaviour is the point. It is the purpose of purpose. As the good people at Blueprint for Better Business say in their excellent recent paper Purpose for PLCs: Time for Boards to Focus: “The business needs to be led by that purpose, seeing itself as a social organisation which cares about people and generates the profit necessary to sustain the pursuit of that purpose.” In the Blueprint analysis, purpose is a discipline, a reason to say no to doing things that, while they may be profitable, do not fit with the purpose — the company’s role in society. “The shift is from a narrow focus on financial value creation alone to a wider, richer view of what a company exists to do in the world.” To my mind this paper is one of the clearest contributions to the debate, short and usefully to the point. It goes on:

“While some stakeholder relationships are more material to business success, being purpose-led means seeking to have a positive impact on all those whose lives are touched by the company, avoiding manifest unfairness to anyone.”

This is the purpose of purpose, unlocking the opportunity of positive impact through business — and perhaps more importantly, having a reason to avoid negative impacts, even if they are profitable in the short term. For all of the cynicism that the noise around corporate purpose evokes, not least because so many users of the term seem to have no real intention to change anything that they do, and all the disagreement about what it actually means, there is a big opportunity for positive impact. Establishing a corporate purpose does need to change what a company does, perhaps on all the dimensions of what, why and how. By each company seeking to have a purpose that goes beyond the simple generation of short-term profit but that instead looks to generate long-term prosperity, we are more likely to achieve that economic prosperity. A broader and larger economic prosperity can then be more fairly shared between stakeholders. Perhaps we should do that on purpose.


Purpose for PLCs: Time for Boards to Focus, Blueprint for Better Business, 2020

The Purposive Transformation of Company LawDavid Kershaw, Edmund Schuster, LSE Law, Society and Economy Working Papers 4/2019

Boards, Patrick Dunne, Governance Publishing 2019

Profit & Purpose, letter to CEOs 2019, Larry Fink, BlackRock

Principles for Purposeful Business, How to deliver the framework for the Future of the Corporation, The British Academy, 2019

Can a Broader Corporate Purpose Redress Inequality? The Stakeholder Approach Chimera, Matteo Gatti, Chrystin Ondersma, forthcoming Journal of Corporation Law, 2020
Also Oxford Business Law blog, June 11 2020

Making Corporate Purpose Tangible, SquareWell, 2020
Also Harvard Law School Forum on Corporate Governance blog, June 19 2020

Who’s drinking all the Lemonade?, Oxbow Partners, July 30 2020

Lemonade IPO Prospectus, 2020

Poverty isn’t bashful

Poverty is bashful says the Pope repeatedly in the first of the BBC’s Rethink essays. Rethink is a series of podcast reflections on the recovery from Coronavirus, and the world that we might aspire to creating once we escape our current constrained existence. Many hope that this is an opportunity to build a fairer world.

Far be it from me to suggest that, contrary to Catholic doctrine, the Pope is fallible — and I must admit that this particular Pope has far more direct experience of poverty than I do. So I won’t say that he is wrong; I will say that I disagree. Poverty is not bashful.

Poverty isn’t bashful. Rather, it is forced to the sidelines of our lives, it is ignored, it is chased from our streets by officious authority, squeezed into slums and ghettos, moved from public space by private closures — the gated communities of the wealthy or their ungated analogues POPS (the informal acronym for the privately owned public spaces that increasingly crowd our cities). It is hidden because it is inconvenient and difficult and so rarely reaches public or media attention. Companies hide it away by casualising their own workers, or outsourcing services or manufacturing, in effect pushing poverty down their supply chains, while squeezing what they pay suppliers making poverty wages more and more likely. That makes poverty less visible but no less present.

Poverty is forced into the corners because we hide it away, preferring not to know, preferring not to be embarrassed by the shame it inflicts on our comfort in the face of its discomfort. We collectively turn our eyes away, just as we do from the beggars on our streets or the sellers of the Big Issue (and other street papers around the world). In our comfortable lives it is more reassuring not to think of those on the margins, those who struggle day-to-day. These are not just the homeless, but also those struggling to put food on the table, dependent on free school meals and foodbanks — people whose ranks were growing ahead of the Covid crisis and have swollen still further during it. 

Poverty is not bashful. We choose to ignore it.

In part, we ignore poverty because we tend to fool ourselves that somehow most poverty is deserved. While some — perhaps — is, much arises from unavoidable circumstance. We so love to believe in meritocracy that we tend to ignore this unavoidable nature of much of the poverty around us.

One benefit of Covid 19 is that it has become harder to ignore others, it has become harder not to see the poor. Instead, it has become more clear how connected we are, how intimately our very chance to live is tied up with others. In a similar way, it has become harder for businesses to ignore the interests and basic needs of their workforce and the implications of how they are paid and treated. It has become almost a cliche among stewardship-minded investors that they will need to focus more in the next several months on the S (social) in ESG — meaning that they will increasingly challenge the companies in which they invest to do better in terms of how they treat their workforces. In part I suspect the reason for this new focus is guilt that they have previously given these issues only limited attention.

The Pope says we need to see the poor, that currently we don’t see them because we perceive them as only part of the landscape, just things. This I do agree with: we need instead to recognise their humanity. Companies need to recognise the human needs of their employees, and of the workers in their supply chains also. Just seeing more clearly would deliver to us all a greater sense of community, and would deliver a real opportunity to reduce the poverty and unfairness around us.

That would be a great, and a fairer, legacy of the Covid crisis. Let’s not be bashful.

The pursuit of happiness II

The Covid crisis is getting in the way of our pursuit of happiness.

Perhaps unsurprisingly, it has made us all more concerned about our health, both physical and mental, and it is also putting relationships under pressure. In addition, job satisfaction, the other leading driver of our sense of well-being, is being challenged for many as work changes, or in some cases disappears altogether.

These are findings of statistics from across Europe reported by McKinsey in a recent article, Well-being in Europe: Addressing the high cost of COVID-19 on life satisfaction. As the subtitle says, “Recovery will depend on saving lives, sustaining livelihoods, and supporting quality of life”. 

It is to my mind completely counter-intuitive to try to convert well-being into monetary terms (another case of misleading apparent accuracy of measurement when money is not the answer), but that doesn’t stop McKinsey, which delights in putting specific numbers even to the most subjective concepts. It leads them to the striking conclusion that Covid has led to a reduction in well-being three times as large as the fall in GDP experienced by the continent: 

McK wellbeing Covid

This analysis is particularly counter-intuitive given that McKinsey itself states that: “When it comes to life satisfaction, leaders tend to overestimate the relative importance of money and underestimate the value of non-monetary factors.”

To re-emphasise the importance of those non-monetary factors, the largest drivers of the reduction in well-being, or the fall in happiness, are the non-financial. By far the most substantial drop is in overall satisfaction with relationships; second, but with an impact less than half as large, is the fall because of lower health outcomes. Only after this come the more financially-driven factors: third is reduced income, and half as big as this is the impact from increases in unemployment. While one assumes that this last factor may have an increasingly negative impact as the extraordinary employment support measures that exist in much of Europe are unwound, it would have to quintuple in scale to reach the significance of the relationship element.

The conclusion is simple enough: leadership out of this crisis will take more than a focus just on the financial, just on the narrowly understood economic life. Instead, it will need to foster well-being, fairness and a focus on enabling the pursuit of happiness. As I suggested in The pursuit of happiness, we need leaders who remember what it is that makes life worthwhile.

The pursuit of happiness

All eyes are currently on the USA. Many there now acknowledge that rights to pursue life and liberty, as promised in the assertions of the Declaration of Independence, vary unfairly depending on the colour of an individual’s skin.

History echoes. In 1963, Martin Luther King Jr made his ‘I have a dream’ speech and spoke of the Declaration of Independence as a promissory note written to every future US citizen. “It is obvious today that America has defaulted on this promissory note, insofar as her citizens of color are concerned.” Perhaps this failure to deliver on those fine words is not surprising when the nation’s founding documents were written by slave-owners who asserted that all men are created equal without any apparent sense of irony.

The lack of equality, the lack of fairness, currently is clear. Research shows that “In 99% of neighborhoods in the United States, black boys earn less in adulthood than white boys who grow up in families with comparable income.” As reported by the New York Times, overall, 46% of poor black boys will remain poor as adults, while the same is true of 32% of poor white boys. Poverty should not be a heritable condition and should not depend on arbitrary factors, especially not in a nation whose self perception is that every individual has the chance to prosper. It does not fulfil the American Dream that unfairness infects that society, and merit is not the determinant of success (and too many over-believe in the power of merit: see Meritocracy’s Unfair). 

As well as the questions about the rights to life and liberty, the third of the ‘self-evident’ rights — to the pursuit of happiness — seems very much in doubt. The USA is not happy. According to the Hedonometer, these are the world’s unhappiest days in the sad long decade since the financial crisis, with the protests against police violence marking the single saddest day:


While the Hedonometer attributes this to the world as a whole, the data is mostly a function of the US experience. The Hedonometer uses the Twitter Decahose feed, a 10% random sample of the 500 million daily tweets worldwide, and selects those tweets deemed to be in English for its analysis. It then assesses the degree of happiness of the 200 million individual words that those tweets include. Since 21% of Twitter users are from the USA, and they will form a much greater percentage of those tweeting in English (Japan and Russia being the second and third largest sources of Twitter users), it is fairer to say that these are the US’s unhappiest days (the dominance by US sentiment is amply demonstrated by the double happiness spike towards the end of each year, representing Thanksgiving and Christmas). 

While the recent plummet is striking, perhaps most notable from this chart is what appears to be an overall downwards trajectory. People in the US in 2019 were consistently less happy than they were a decade previously, at the height of the financial crisis; that in spite of consistent GDP growth in 2019 and a dramatic recession in 2009. It is clear that economic success and GDP growth do not equate to happiness, and clear that the pursuit of happiness is failing.

It seems that the USA may unhappily have been aiming for the wrong things. Perhaps it is another case of the errors that are introduced by managing to what is easily measured.

For just as President Trump evidences his foolishness by continuing to equate stock market performance with the performance of the economy as a whole — it would be impossible for any truly successful businessperson to mistake the one for the other — it is foolish to equate GDP growth with general success, and so with happiness. Yet that is what the US, and much of the world, continues to do.

The founding fathers, for all their evident hypocrisies, were wiser. Jefferson’s choice of “the pursuit of happiness” for the rhetorical third arm of the self-evident rights marked a deliberate rejection of the more common use of “property” as the right sitting alongside life and liberty. This focus on property was based in the work of John Locke, who variously talked about life, liberty and ‘estate’ or ‘possession of material things’. While scholars debate Jefferson’s thinking in this respect, it is clear that he abandoned a narrow focus on material things and invited a broader look to a richer understanding of life satisfaction. Human flourishing is not just a function of property and wealth; and fairness in society is a necessary element of flourishing human communities, so that happiness is shared across society and is not enjoyed only by those who are most financially successful.

The failings of GDP have been broadly articulated. For example, I very much enjoyed Kate Raworth’s thoughtful and beguiling account in Doughnut Economics. As she notes, this harks back to the origins of economics itself. Aristotle distinguished economics, effective household management, from chrematistics, the art of acquiring wealth. The fixation on GDP growth as the measure of success feels more like chrematistics. 

Some countries have made an attempt to think more broadly about the purpose of government and of economics. The country most explicitly trying to break this fixation is tiny Himalayan kingdom Bhutan, which ignores GDP altogether and aims to deliver instead Gross National Happiness. While some are cynical about the happiness project, and indeed the genuine happiness of the nation’s people as a whole, the 33 measures under 9 domains that it uses to calculate the GNH score give an indication of the breadth of interests that need to be considered in a full understanding of what a true pursuit of happiness might entail:

  • living standards 
  • health
  • education
  • good governance 
  • ecological diversity and resilience 
  • time use [a sense of work-life balance]
  • psychological wellbeing [quality of life and life satisfaction]
  • cultural diversity and resilience 
  • community vitality

I share concerns about an attempt to put a number on happiness, but at least the Bhutan approach feels more coherent than the wreckage left in the UK of former prime minister David Cameron’s short-term fixation on wellbeing rather than just hard economic numbers. The Office for National Statistics is still attempting to collate and report on this, on a basis that amounts to little more than calls to a random sample of the population asking how they feel.

The interesting thing is how much is needed fully to deliver on happiness, and how little of that is currently represented in what is counted as economic life, and in GDP. Indeed much of it, particularly the ecological, runs expressly counter to how GDP is calculated. And the prominence of health in the calculation feels particularly apposite in current circumstances.

If the US truly is to think about how to deliver on its promissory note of the pursuit of happiness, it will need to rethink things fundamentally. Part of that will be to treat all of its citizens fairly, but a large part is to develop a very different consideration of what success looks like. Building and favouring resilient and vital communities will prove a part of that.

As history echoes down the years it is worth reflecting on Robert Kennedy’s words at the University of Kansas in the first days of his presidential run in 1968 (three short months before his sad assassination, the anniversary of which was just a couple of days ago): 

“Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things.”

Bobby railed at the oddness of the calculation of GNP, that it includes as positives pollution and environmental destruction, it counts additional home security measures and building more gaols, it counts military spending and the purchases of criminals’ weapons, while ignoring health, quality of life and joy: “it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.”

All eyes are on the US. Many are wondering if they should continue to respect the country, whether the nation should retain its pride in itself. Fairness is a necessary step. But perhaps if it paid out on that promissory note to all its citizens, particularly with regard to the right to the pursuit of happiness in all the richness and depth that the phrase implies, there might be a reason for real pride.

Jefferson, and his fine words

See also: The pursuit of happiness II


I have a dream, Martin Luther King Jr, 1963

Race and Economic Opportunity in the United States: An Intergenerational Perspective, Chetty, Hendren, Jones, Porter, Quarterly Journal of Economics, March 2018

As reported in Extensive Data Shows Punishing Reach of Racism for Black Boys, New York Times, March 2018


Doughnut Economics, Kate Raworth, Random House 2017

Bhutan Gross National Happiness

Office for National Statistics Wellbeing data

Taxing gains, closing loopholes

It seems certain that taxes will have to rise, at least in due course. It will not be the full answer to this need, but fairness demands that a simple first step must be to close loopholes and deal with anomalies in the system. I’ll write shortly again about corporate taxation, but this blog is regarding the unfairness embodied in capital gains taxation.

Just as anomalies around differential taxation of the self-employed have been exposed by Covid bail-outs applying in an equivalent way to them as to furloughed employees, so have the anomalies around personal service companies. These are used by individuals to offer out their consulting and advisory services, paying out income as dividends and used as stores of value that can be unlocked as capital gains at winding up — both forms of income facing lower levels of taxation than employee rates. Again, many of these individuals have sought Covid bail outs as if they were employees. The bail-outs imply that we are all in this together, but the prior tax advantages of this small group indicate again that we most definitely are not.

To give some shape to the disparity of the distribution of taxable gains, the US’s Tax Policy Center identifies that the top 1% of taxpayers by income received around 75% of the total benefit from that country’s preferential tax treatment of capital gains. This is far from fair and equal:

“Preferences for capital gain and dividend income will reduce tax burdens in 2019 by 5.7 percent of income in the top 1 percent of the income distribution, compared with 1.4 percent of income for other taxpayers in the top 5 percent of the income distribution and a smaller share of income for lower-income groups.”

Few taxes are as regressive in their impacts. The unfairness could be removed by equalising the tax rates charged.

The UK and much of the wider world, including the US (at least for gains on assets held for more than 1 year), charge lower tax rates on capital gains than on income. Personal service companies are just one way in which this differential is exploited by those able to choose to take income as gains. Another is carried interest, through which a number of private equity and other investment professionals are paid significant portions of their reward — in a form that is ostensibly aligned with the interests of their clients. 

The Resolution Foundation recently issued a report highlighting the extent of capital gains as a portion of the overall level of income in the economy. Using HMRC data analysed by a team based at LSE, the paper identifies the significance of taxable capital gains, worth some £55 billion overall in 2017-8. While this represents around £1000 for every adult in the UK, it is much more highly concentrated even than overall income levels: that total was shared by only 260,000 individuals and 62% of it was received by just 9000 individuals, each of whom gained more than £1 million.

The fact that much of this is income by another name is amply demonstrated by a chart that does not seem to appear in the report but was part of the associated presentation. This shows the persistence of taxable capital gains: fully a third of those with significant taxable gains in one year had also had significant gains in recent prior years. Gains are less lumpy than theory would indicate, suggestive of this being an exploited loophole.

RF capgains persistence

One of those areas likely to be persistent, because it clearly is income in another form, is carried interest. This is a very significant income for a small handful of individuals, as the table of data gleaned from HMRC under FOI legislation amply shows:

RF carried interest

Those benefiting from the favourable treatment of capital gains are already well paid: 45% of all gains were received by those in the top 1% of income earners (understanding income now in the narrow sense usually used, ie excluding gains). Only a tenth of the top 1% of income earners change when capital gains are included in the calculation. And the existence of capital gains makes the disparity between the haves and have nots starker than it is already: the top 1% by income take home fully 13.8% of overall income; when gains are included, the top 1% receive 16.8% of the total pie. Including capital gains in income calculations for other countries also leads to greater apparent disparities, and disparities that are also increasing over time. We know that capital has been favoured over employment since the financial crisis, and this is the natural — and unfair — consequence.

It is clear that the favourable tax treatment of capital gains is unfair, and in the context of a need for taxes overall to rise, it is also unsustainable.

But perhaps we should not stop there: taxable capital gains are an understatement of overall capital gains enjoyed by recipients. Loopholes could also be closed. For example in the UK there is an annual capital gains allowance, currently £12,300, meaning gains less than this are not taxed at all. Removing this allowance, perhaps just for those calculating self-assessment tax (ie all higher earners), would seem fairer. Cars are exempt, which is bizarre given that it can only be a very small subset of cars that ever see a gain in valuation — a subset open only to the wealthiest owners. Gifts to spouses and civil partners are exempt also, allowing some sharing out of assets (at the same time sharing capital gains, and indeed inheritance tax, allowances). Removing these exemptions seems logical and fair. More justifiable economically is the exemption for the gains on a main residence given that taxation of those might potentially have a chilling effect on mobility and freeing up unused property.

Capital gains taxation is only one example of income from wealth being taxed less heavily than income from work. That differential tax burden seems unfair and unjustifiable, and now is probably the time for that broader unfairness to be addressed also. One step in the right direction might be a land value tax. In an environment that will need economic stimulus, such a tax could have the benefit of promoting economic activity by giving an incentive to put assets to good use. The taxation of unearned gains, such as those from winning the lottery of planning consent, might need to be more generally considered. Whether we are ready yet for broader wealth taxation may be doubtful, but taxation focused on land, and on gains on land values, do have the benefit that these cannot be expatriated and taken beyond the reach of the exchequer.

Radical steps have already been taken to keep the economy alive. Radical steps will be needed to rebuild the fiscal base. Fairness needs to be part of those considerations.


The LSE team are holding a forthcoming webinar on their tax research:
How Much Tax Do The Rich Really Pay And Could They Pay More?
Monday 15 June 2020 4:00pm to 5:30pm


Distributional Effects of Individual Income Tax Expenditures After the 2017 Tax Cuts and Jobs Act, Tax Policy Center, June 2019

Who gains? The importance of accounting for capital gains, Resolution Foundation, May 2020

Not all in this together

Disease and death are often thought to be the great levellers, the shared suffering from which the rich cannot cosset themselves. But of course we know that this is not true of Covid-19. Actually, it isn’t really true of many diseases, which will always prey on the more vulnerable and those unable to afford good care. Nonetheless, it is clear that Covid-19 has a particular tendency to seek out those already facing disadvantage. Among the virus’s many nastinesses, it is both sexist and racist, and its impact seems to be felt disproportionately by the poor, not only because we underpay those we now recognise as essential workers. It is an unfair disease, exaggerating unlevel playing fields rather than acting as a leveller.

“The weak and the most marginalised are paying the highest price,” said Helle Thorning-Schmidt, Denmark’s former Prime Minister, at a recent Tortoise event in response a question from me on fairness.

Though we don’t understand why, Covid-19 is racist. It is now widely recognised that the virus has a greater impact on those from BAME backgrounds, to an extent which goes beyond their greater representation in front-line workforces and their higher presence in harder hit urban areas, and does not seem a purely economic effect. The sole way in which Covid-19 seems not to favour the already advantaged is in its sexism: men, being the weaker sex, seem to be much more prone to succumbing to the worst effects of the disease, and are disproportionately represented among the dead.

Additionally, the lockdown response in many countries provides further protections to the wealthy, while leaving the less well-off financially more exposed. Those expected to continue to attend their workplaces are predominantly blue collar workers, while better paid white collar staff are encouraged to work from home. This is true generally but also perniciously within individual workplaces [full disclosure: I write this comfortably at home, as I have been throughout]. Poorer children are more disadvantaged by lockdown learning, and those joining the workforce will also face greater challenges. The simple fact is that the wealthy are not risking exposure to the virus in the same way as the poor are, and most do not face any issues around the existence or adequacy of protective equipment. That divide applies also between nations, where emerging economies generally will have less protection than the wealthy, and sadly we will see how that plays out over the next few months (though there are positive signs from some).

So, although this Covid crisis is a national and international event to which all are exposed, we are not all in this together in the same way. Our experience is not the same: the virus is acting to re-emphasise pre-existing unfairnesses.

The implication of this tendency is that policy responses to drive the recovery need to lean very strongly against the unfairnesses that Covid-19 bolsters. If we aren’t all in this together, we can at least all be swept up by the opportunities created by rebuilding our economy once we’re through the current crisis. Still better if the recovery favours those hit hardest. Most expect Keynesian stimulus to follow the efforts by governments to limit the huge economic plunge caused by the virus; designing it right will make a significant difference to the shape of our exit from the crisis.

There are a number of measures of how this might best be done: 

  • any economic stimulus needs to be broadly spread so as to advantage disadvantaged areas
  • the stimulus needs to be quick acting, not a long-term promise that will take multiple years to be delivered
  • the stimulus should be designed so as to deliver not just economic stimulus but social stimulus, advancing the interests of those in greater need; the multiplier effects must be maximised
  • it also needs to build in environmental considerations so that it acts to mitigate the coming climate crisis

While I’m sure others will be able to develop other ideas (I myself have some), one possible programme that might deliver against these criteria could be the following:

Scheme: £100,000 pot for repairs, refurbishment and other essential works (including insulation and other green investment) at every school in the country, to be spent within 2 years. In the UK, there are some 25,000 primary and secondary schools, so that the overall cost of this would be a manageable £2.5 billion. It may be that the scale of the pot should be varied between primary and secondary schools (for example, a similar total spend would be reached with a £75,000 pot for each primary school, and £150,000 for each secondary and special school).

Speed: Unlike a single infrastructure spend with such a budget, because this proposal is in relatively small units dispersed around the country the money could be put to use more rapidly using smaller building operations, and would be more likely to have a positive economic impact felt nationally not just in a single region. That is of course in addition to assisting dramatically the quality of life for pupils and teachers, and relieving a burden on school budgets. If there is a rare case of a state school without any ability to use such a pot, the surplus could be passed to the neediest nearby school, as identified by the local authority. 

Multiplier effect: With all school budgets squeezed this would free budgets to be spent on current expenditure rather than capital costs. Many improvements are desperately needed, and many enhancements may reduce ongoing expenses as well (eg insulation reducing heating costs). There would be significant benefits if this enables better focus of future school spending on education itself.

Building in further multiplier impact 1: perhaps a requirement to bid for this work should be that any participating worker is training up an individual under the age of 25 to take up their trade. This would help address the gap in apprenticeships, especially for that age group (which is only likely to be exacerbated by the Covid crisis), reduce youth under-employment and rebuild the availability of scarce skills.

Building in further multiplier impact 2: perhaps any materials used for these works should be sourced within the UK, stimulating the economy more broadly.

This must be the measure of the steps taken to drag ourselves out of the Covid crisis: that they move us in the direction of fairness rather than exacerbating our current unfairnesses, which the virus is only adding to.


Resolution Foundation: Effects of Corona Virus on Workers

Institute for Fiscal Studies: Learning during Lockdown

Resolution Foundation: Class of 2020

The Investor Agenda: A Sustainable Recovery from the Covid-19 Pandemic

Governing through the lens of fairness

My article for the latest edition of Governance journal, thinking through the nature and tone of business that needs to be built when we start to come out of the current crisis, building on the foundations of fairness:

Gnance strapline Apr20

(Sadly available to subscribers only).

The article develops some of my thinking on fairness and stakeholders, including the discussions in the following:

Stakeholders generally

Accountable capitalism


The limited responsibility company, or the tale of the unnatural revolutionary

Solidarity: fairness and the workforce


Just transitions and gilets jaunes


Demanding supply

Unfairness overwhelms bankruptcy


Fairness for customers

Credos and a fair return


Talking with the taxman about fairness

Simplifying tax is fairness

As the article says:

“They say that adversity brings out the best in people. I’m not sure that we’re currently seeing evidence of that across society and the corporate world. Rather, what seems to be happening is people are tending to revert to type. Good governance can help ensure that the type to which we revert is a thoughtful and fair one. Good governance using the lens of fairness will give us all the best chance to build businesses that will effectively deliver for all once we are beyond the current dreadful but temporary circumstances.”

Never let winners write the rules

Like history, law is usually written by the winners. Regulation often is also. As with history, that writing of the rules can lead to mistakes. It can fool us into unfairness. If we want to generate fairness, we need to press against the tendency to favour those who have already been successful, making sure that the rules are not only written by the winners.

This tendency, and the social impacts that it has, are brought into relief through a trading game called StarPower. The winner is the player who has gathered chips of greatest value at the end. At the start, players are allocated chips of random worth and then go through a round of trading, after which they are allocated to one of three groups: those with chips of greatest value are the ‘Squares’, those who have amassed chips of lowest value are ‘Triangles’ and those in between are ‘Circles’. They are given relevant badges to wear and thereafter sit in their different groups, emphasising their stratification. These are not even allocations, as the Squares represent only 10% of the whole group. 

The games’ deliberate unfairness is then institutionalised by the hidden mechanism of Squares drawing additional tokens from a bag with a greater proportion of high-value chips, while the Triangles are invited to draw only from a bag with predominantly low value chips. This unfairness is masked by some scope for additional draws by a few Circles and Triangles so that some have a small chance of advancing through the classes. After the second trading round, unfairness becomes further entrenched because the Squares — asserted to be the most ‘successful’ players of the game — are invited to set the rules for future trading rounds. Apparently invariably, the Squares are tempted to further rig the game in their own favour, closing the door to the entry of any rivals for their dominance.

The game works best as a lesson in unfairness, Nnawulezi et al report, where the facilitators play to participants’ belief and hope in meritocracy — encouraging applause and praise for those who end rounds with the highest scores, as clearly they have worked the hardest and are successful as of right, and emphasising to those with lower scores that they just need to work harder in order to achieve. As discussed in Meritocracy’s Unfair, because we all want to believe in meritocracy we are at risk of ignoring the failures to deliver real meritocracy and the unfairness that surrounds us. This tendency tends to play out in StarPower. The successful too often fall into the trap of believing that they deserve their success through their own skill and effort, not just luck and/or their advantageous starting position.

The psychological force of the experience of disadvantage, even within such a short game, is powerful. One individual with experience of running multiple StarPower games reports the Triangles feeling: “despondent, angry, self-blaming, self-critical, resentful, and often give up on playing the game, or sometimes simply cheat”. Another — Donella Meadows, the environmental thinker and sustainability guru — also reports apathy as the predominant response of Triangles, once they work out the game is rigged against them, and notes that they only rarely rise above this: “They come to life only if they think up a way of cheating or of creating a revolution. Only subversion brings out their interest and creativity.” This seems a very natural response to unfairness; it is hard to blame those who are trapped in such circumstances.

StarPower is just a game, effective though it is in bringing to light various human tendencies. But we see those same tendencies play out in real life. A number of organisations say that ‘doing the right thing’ is a core element of their corporate mindset, but fewer actually deliver on that in practice. As one student participant commented in Scott Allen’s survey quoted in Simulations as a Source of Learning: “There will be times when one has to make ethical decisions. One may have to give up power to make the right decision.” Fewer organisations, and fewer individuals, will give up power in this way than like to imagine they will. Finding ways to ensure organisations fully deliver on the promise of doing the right thing is an ongoing challenge, and takes real leadership.

Winners tend to dominate regulatory thought processes; they have much more resource to spend on lobbying and advising regulators and legislators, much more scope to influence. Inevitably, they believe that the circumstances that allow them best to prosper are the right ones. As with StarPower players, they probably come to believe that what leads to further success for them is also good for the general population, because after all their ongoing success represents building on existing winners, and bolstering market leadership (often seen as particularly important in a globally competitive world). Yet the danger is this favouring of the already successful bolsters the status quo and squeezes out competition, particularly by the small, the insurgent and the entrepreneurial. It can make the system as a whole less robust because incumbents may be less responsive when change is genuinely needed. People tend to talk about this as regulatory capture, but really it is just poor regulation, and good regulators need to work to avoid it.

Regulatory capture, though a relatively new name, has a long history. Aristotle in his The Politics and the Constitution of Athens wrote “The true forms of government, therefore, are those in which the one, or the few, or the many, govern with a view to the common interest; but governments which rule with a view to the private interest, whether of the one, the few, or the many, are perversions.” The bending and corruption of rule-making to private will is a perennial human tendency that needs to be recognised and fought against. As is the tendency among many in power to believe that — even though they set the rules — the usual rules do not apply to them, or that they can breach their own rules almost without impunity. That tendency has been again seen of late, and it too needs to be lent against if leaders are to govern with the consent of the people, which requires a sense that society is demonstrably fair.

Regulatory capture is often used as an argument that regulation inevitably fails and should be abandoned in favour of a freer market. It’s an odd conclusion to draw, when the answer is more surely to make regulation better rather than abandon it altogether. “Using ‘capture’ as an excuse was in itself a form of capture,” suggests Georgetown professor and advisor to utility firms Scott Hempling in a powerful analysis of regulatory failings — and the political failings that led to them — in the US electricity sector. For example, he notes that framing an issue from the perspective of the regulated can often be a problem, rather than framing from the perspective of the consumer. 

Hempling offers ways to avoid regulatory capture, under which the regulator: 

  • reframes every application from a private interest request to a public interest question; 
  • evaluates industry performance, considering outcomes for consumers rather than industry inputs;
  • nurtures, educates and advances its own professional workforce; and
  • obtains resourcing based on need not dependent on the whims of politics.

This approach should lead to fewer rules being written by those who are already winners and so to a greater fairness in rule-making. It would avoid falling into the unfair traps of history.


I am grateful to my friend William for drawing my attention to StarPower.


StarPower, Simulation Training Systems (founder Garry Shirts, 1969)

Star Power: An Experiential Learning Exercise to Foster Ecological Perspectives on Power, Privilege, and Oppression, Nkiru Nnawulezi, Christina Campbell, Kalleigh Landstra, Se’ara Davis, Cortney Vandegrift, Amanda Taylor, J Prev Interv Community, 2013, 41(2)

StarPower: Experiencing a Stratified Society, Carol Mukhopadhyay (2014)

Why Would Anyone Want to Play Starpower? Donella Meadows (2011)

Simulations as a Source of Learning: Using StarPower to Teach Ethical Leadership and Management, Scott Allen, Journal of Leadership Education 7.1 (2008)

“Regulatory Capture”: Sources and Solutions, Scott Hempling, Emory Corporate Governance and Accountability Review, 1(1) 2014

Democracy – playing fair

The wonderful Barbican Centre in the City of London has been prepping an exhibit called Playing Democracy. This apparently seeks to explore democracy through the medium of a large-scale game of Pong — the original computer game with the paddles on either side of the screen, simulating some form of table tennis. Do not ask me how this might be intended to work.


The key to the intended game — or at least the lessons that it might teach us about democracy — appear to be the variables that players can choose to apply, located at the right-hand end of the screen.

Who would choose — if they had the choice — to play a game, or live in a democracy, that was not fair, that was not equal, and/or that was not free?


Unfortunately, as well as social distancing challenges (it’s intended as a two-player game), there appear to be technological difficulties with the game.

This final image is reproduced without comment.


Unfairness overwhelms bankruptcy

The dice are being loaded in corporate collapses. No longer is fairness central to how debt and financing issues are worked through in bankruptcy. Instead, an egregious process occurs where the strongest party enforces its interests. And the courts seem loth to intervene.

That at least is the situation in the US, and at least in the view of University of California Associate Professor of Law Jared Ellias, and Robert Stark, a New York partner at law firm Brown Rudnick. The pair have authored a hard-hitting forthcoming California Law Review article called Bankruptcy Hardball.

The authors trace this change from a mindset of fiduciary duty and fairness to a negotiated toughness to a pair of Delaware court decisions, the senior one reached on the eve of the financial crisis, when perhaps too many thought that straitened financial times might not be seen again. The cases were Gheewalla in the Delaware Supreme Court [N. Am. Catholic Educ. Programming Found. v Gheewalla, 930 A.2d 92 (Del. 2007)], reinforced by Quadrant Structured Products in the Delaware Chancery Court [Quadrant Structured Prod. Co. v Vertin, 102 A.3d 155].

One of the main conceptual bases for these decisions was that creditors did not need protection as they were large enough and influential enough to look after themselves. One thing that most of the world did not recognise before the financial crisis was the extent to which corporate debt had been sliced and diced and sold on to multiple investors — a process which could be seen to argue precisely against this conceptual basis. Nonetheless, the courts decided that no judicial protection was needed. Director business judgment was to be left largely unfettered. This set the context for bankruptcy hardball:

“While courts thought they were reducing the costs of contracting by not requiring creditors to attempt to anticipate all potential scenarios where their interests could diverge from shareholders, academic contract theorists became increasingly convinced that equitable doctrines aimed to achieve fairness – like contract law doctrines that would void otherwise enforceable contracts – were largely unnecessary.”

The consequence is that, “Without fiduciary duty, creditor protection rests on the idea that creditors are sufficiently protected through contract law, with fraudulent transfer law and bankruptcy law hovering in the background”. And this is proving a weak basis for fair restructurings and court decisions. The authors identify a series of examples where hardball decisions have been taken that run counter to fairness and prior understandings of the just allocation of residual value between the shareholders and various creditors. At PetSmart, Forest Oil, Cumulus Media, Colt Holdings, General Growth Properties, American Safety Razor and Lyondell, the authors highlight a series of case studies where the outcomes are unfair and contrary to where good public policy might lead.

In an associated blogpost, the authors summarise these outcomes bluntly:

“the current level of chaos and rent-seeking is unprecedented. It is now routine for distressed firms to engage in tactics that harm some creditors for the benefit of other stakeholders, often in violation of contractual promises and basic principles of corporate finance.”

And the result is not a narrow impact on a small number of investors who ought to be able to protect themselves — or at least should be able to cope with the outcome. In the article, the authors argue that the overall consequences of the new approach are severe, and invite excessive aggression in the structuring of the financing of companies, potentially creating more business failures and defaults:

“The slow moving trains of justice here have broader consequences than denying justice to one particular plaintiff or another. It emboldens the entire private equity industry to extract excessive dividends from portfolio firms, knowing that it might take more than a decade to litigate the fraudulent transfer action, by which time every employee currently at the private equity firm will be gone.”

This may not seem to matter to those of us in the UK, where we believe there will be constraints on the actions of debt-holders and where the switch of directors’ duties in insolvency from an enlightened shareholder model to seeking to minimise the losses of creditors (the consequence of, among other things, s214 of the Insolvency Act), seem to offer significant defences.

But there are cautions from this switch in the US nonetheless. We have seen the UK’s insolvency regime being abused — the number of phoenix companies, put into insolvency and almost immediately revived, continues to increase. This takes advantage of their suppliers and other creditors — which almost always lists the taxpayer at the top of the list as VAT and payroll taxes are rarely paid up to date. This increase continues despite successive governments saying this is an issue that they are keen to address. The case of Comet, covered energetically by Tabby Kinder of the FT, is but a particularly egregious, and apparently abusive, example. According to her reporting, the taxpayer was left with a £50 million bill while the investors profited by £100 million less than a year after buying the collapsed company for just £2. 

“The private equity firms stitched up a structure that guaranteed a huge profit from insolvency, which went unchallenged by the administrators,” an anonymous source told Tabby.

So we should not be complacent. We should also not be complacent because we consistently hear from UK governments that they are keen to replicate the US Chapter 11 bankruptcy regime — believing that this would help instil a more entrepreneurial culture and less of a sense of embarrassment about business failure. In any move in this direction we need to ensure that the protections of fair dealing we assume to be in place are indeed retained, and that we do not import the negative behaviours and approach that now are reported as prevalent in the US. All too often we adopt the cultural approach of US business almost by accident; some might argue that the Comet case is evidence that we already are. Fairness would argue that in this area we need to guard against the tendency.

In the quantitative eased world of almost free debt, we face unprecedented levels of leverage across the financial system. With this having been accompanied by a race to the bottom in terms of covenants on debt, many of the usual protections that debt-holders might have expected to enjoy are not in place. There is a real danger that court protection will not be there either. The result is unlikely to be pretty, and it seems very unlikely on recent evidence to be fair.


I am grateful to a dear former colleague for bringing Bankruptcy Hardball to my attention.


Bankruptcy Hardball, Jared Ellias, Robert Stark, 2019
forthcoming in 108 California Law Review

Associated OBLB blogpost, Jared Ellias, Robert Stark, Oxford Business Law Blog, 2019

Hailey’s Comet: how Deloitte helped funds win a distressed bet, Tabby Kinder, Financial Times, February 2020