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.
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:
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.
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:
ecological diversity and resilience
time use [a sense of work-life balance]
psychological wellbeing [quality of life and life satisfaction]
cultural diversity and resilience
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.
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.
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:
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.
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.
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:
(Sadly available to subscribers only).
The article develops some of my thinking on fairness and stakeholders, including the discussions in the following:
“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.”
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.
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.
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.
“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.
Large UK companies will shortly be obliged to disclose the differential in pay between their CEO and the median in their UK workforce. This new executive pay ratio disclosure was the subject of an interesting meeting yesterday hosted by the High Pay Centre, Standard Life Foundation and NatCen Social Research, marking the launch of a joint project to capture and report on pay ratio disclosures. Happily for this blog, much of yesterday’s discussion reflected on the issue of fairness.
Most on the panel and in the self-selecting room (being constrained by the Chatham House rule, I may not attribute any comments to individuals) welcomed the move to disclose ratios and the potential impacts of that disclosure. There was, however, some doubt about how significant those impacts might be, in terms of either constraining executive pay or increasing fairness.
As well as requiring disclosure of CEO pay against the median of the UK workforce, the new reporting regulations require it to be compared with both the 25th and 75th centiles, potentially revealing more about the overall shape of pay across the workforce (the lower of these was felt to be of particular significance by those campaigning in support of the low paid). In addition, the board must seek to explain any changes in the pay ratio year on year — specifically whether this is due to changes in pay levels or to changing business models (including moves to outsource, for example) — and “whether, and if so why, the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole”.
Notwithstanding this range of required disclosures, it seems likely that the bulk of the attention will be on the median pay ratio itself. The powerful comment was made that there is a danger that we have taken a big and complex issue and tried to turn it into a single uninformative datapoint that narrows the focus and risks distracting from the breadth of the issue. Not least because ratios will vary between sectors and because of different business models within sectors, and because of the different extents of activity within the UK — there will be minimal comparability between companies. This is another possible case of it being unhelpful to focus solely on numerical analysis.
Some participants in the discussion believe that the new requirements to report in relation to a director’s s172 duties to all stakeholders, in particular in this context naturally the workforce, are likely to be more powerful. And a number of companies have used these new obligations to report on workforce relations as a reason to mount fair pay audits and consider what fairness looks like in this context. Other participants noted how pay gap reporting opens a window on broader issues of corporate culture and provides shareholders with potential questions about how sustainable a business model is if it is based on unfairness — this is a potential “barometer on a company’s culture” for some.
The discussion of the distinction between board approaches to gender pay gap disclosures and the forthcoming pay ratio transparency was instructive. Apparently, many boards readily accepted that gender pay differentials are an issue — a fairness issue — and the disclosure requirement led companies to develop new information, some of which shocked them as well as the outside world. This combination meant there was a readiness to act on the gender pay gap data and to work to address the unfairnesses that were revealed.
In contrast, there is not expected to be any shock value in the pay ratio transparency. If anything, the data for FTSE100 companies is revealing smaller ratios than those estimated previously. Though the ratios are still big, they are not quite as large as the numbers calculated by various campaigners on the basis of available information — as a generalisation apparently, FTSE 100 companies pay better than the country average. Further, it is not clear to corporate boards that a lower ratio is better given that they wish to be paying for performance. Thus, it is less than clear that boards will respond to the new disclosures.
In effect, the argument was that boards do not see the pay ratio as revealing a problem of unfairness that needs addressing.
Happily, there was some encouragement from other sources, though perhaps in a rather negative form. One participant asked the rhetorical question of whether the people at the top of large corporations, both executives and non-executive directors, actually understand what people are paid? In particular, do they know how low the pay is for many workers at the bottom of their income distribution? The revelation of the overall ratio and particularly the lower quartile ratio may reveal new insights for those leading organisations that may lead to different questions and potentially different behaviours — paying lower paid workers more generously, perhaps more fairly.
Let us hope that some of the board conversations that are sparked by the ratio disclosures, and some of the narrative reporting in response to the new requirements, are open about the issue of fairness.
The world of online dating turns out to be one of the most unfair economies there is. It is more winner-takes-all than all but the most unequal countries. Today is probably the least appropriate of days to reflect on this, which is why I’ve chosen to do so.
Perhaps I should say that this is not the usual male post railing at the unfairness of being ignored or unsuccessful on dating sites. There seem to be many of these, contrasting strongly with the usual female complaints about online dating, which appear to be more about the unpleasantness, weirdness and general flakiness of men. Having never used online dating I don’t have a personal complaint to make, but given the data suggesting it is one of the least fair economies in the world, it seemed an interesting area to explore on this blog.
Typically for my blog I reference proper academic articles. However, the sources I’ve been able to locate for this post are far from that, and the most entertaining very far indeed. Worst Online Dater’s ‘study’ included only a handful of participants and his method for gaining their participation certainly would not meet academic ethical standards — he posed as a highly attractive man on Tinder and then sought insights from some of the women who ‘liked’ his profile and started messaging.
His results were striking. He calculated a gini coefficient as high as 0.58 for Tinder’s economy of attractiveness and swipes. This is worse than the income gini coefficient of all but a few of the most unequal countries, such as South Africa. And his Lorenz curve of the Tinder economy demonstrates how far beyond even the unfairness of US income distribution this Tinder unfairness sits:
Though this brief study seems frankly pretty flaky, it is backed up by more robust datasets. The 12% of likes by women it identifies seems consistent with the 14% in more official reports, and with a finding according to OKCupid that women rate fully 80% of men as below average in terms of looks (perhaps contrary to expectations, men appear to have a much less skewed view as to the attractiveness of women). And more generally the inequality of distribution of likes does seem apparent elsewhere. Take Hinge [no? me neither], analysed by one of its own engineers, Aviv Goldgeier (according to an article on Quartz). On Hinge, apparently, users can like aspects of a profile rather than just the individual, meaning that there are potentially more likes to go around. However, their distribution is if anything less fair. The top 1% of men on Hinge receive 16% of all likes, and the top 10% nearly 60% of the total, leaving little to be shared among the bulk of men — the bottom 50% having to make do with less than 5%. The statistics for women are fairly similar but somewhat less extreme in each case:
This gives Hinge a gini coefficient of 0.73 for men, and 0.63 for women, still worse than Tinder’s unfair economy, though the article discusses this in comparison with country wealth gini coefficients meaning it finds further countries are more extreme in their unfairness than Hinge — including the US and UK. It is perhaps an interesting philosophical debate whether profile attractiveness online should be regarded as equivalent to wealth or income, but whatever, it is clear that these dating services are winner-takes-all and apparently highly unfair economies.
But it seems that, perhaps inevitably in a dating context, the largest driver of this unfair dynamic is gender differences. A search for complaints about the unfairness of (gay dating site) Grindr emphasise more that site’s perceived racism and possible exploitative charging than anything else. As an aside, that general tendency of a number of dating services to exploit the wishful thinking of customers by charging them for additional services is readily apparent — see for example the US Federal Trade Commission’s complaint against Match.com in relation to charges for contacting accounts the company allegedly believed to be fraudulent.
It turns out that online dating is seen by men to be unfair mostly because of very different male and female approaches to dating more generally. For example, on Tinder women swipe right (for ‘like’) 14% of the time, while men do so 46% of the time. Women are pickier than men: that is something that even those unversed in the online dating world will recognise as a general truth. So there are less likes to share around the men, and the distribution of them is rather inevitably not fair.