The fairness, the entire fairness, and nothing but?

So, we know that the pay award to Elon Musk by Tesla’s board, to a value that turned out to be over $50 billion, was not entirely fair. The Delaware court has told us this, applying the wonderfully named ‘entire fairness doctrine’. But in proposing that shareholders again approve the award, the Tesla board says that its reinstatement is a necessary step to be fair to Musk.

This is set up as a battle of fairnesses. Is it? I’ll try to break the answer to that question down.

Proxy Statement arguments

When reading the Tesla (preliminary) Proxy Statement, it appears that the board doesn’t believe it has a case to answer, even though it has lost one. Robyn Denholm, in her chair’s letter that opens the (preliminary) Proxy Statement, says that restoring Musk’s pay award “is a matter of fundamental fairness and respect to our CEO”. Further, the voiding of the scheme was “fundamentally unfair, and inconsistent with the will of the stockholders who voted for it”.

None of the damning Delaware court findings (essentially that there was no negotiation process with Musk on the pay scheme, those board members charged with the process of developing the pay plan were not fully independent of him, that some of the performance metrics were not in fact stretching, and that shareholders were misled in the company’s communications, so that their approval of the deal was void) are in any way addressed by the Tesla board in their formal communication. The (preliminary) Proxy Statement explicitly confirms that there has been no attempt at a renegotiation of the pay scheme with Musk. The sole nod to the court’s findings is the creation of the new so-called ‘independent Special Committee’.

This new ‘independent Special Committee’ is not worthy of at least one of those words given that the ‘committee’ was personned by just a single director, Kathleen Wilson-Thompson. Director Joe Gebbia withdrew from the committee when its remit was expanded from the question of whether Tesla should redomicile to Texas (discussed further below) to also include Musk’s pay. “Mr Gebbia explained that he was stepping down from the Special Committee out of an abundance of caution because of the potential for unfair attacks based on perceived conflicts of interest. He stepped down entirely of his own accord,” the (preliminary) Proxy Statement reads.

The (preliminary) Proxy Statement does note that the Delaware court found failures in its processes and invites shareholders to read relevant parts of the Tornetta decision (and publishes that decision in full as an appendix). But it does not directly respond to those findings, which are damning about the board’s behaviour and processes. In failing to deliver ‘entire fairness’, the court found that the board failed to deliver both a fair process and a fair outcome. The (preliminary) Proxy Statement doesn’t seek to demonstrate the fairness of either, only that the proposed remuneration scheme was unusual and unusually stretching in the US (such as including features which are unusual in the US but pretty normal in non-US markets such as a five-year time horizon and extended shareholding periods). The court strongly doubted the need for such a scale of award in order to retain Musk’s services for Tesla – which had seemed a strongly motivating factor in the board’s decision-making. After all, Musk owns more than 20% of the company and this shareholding represents well over half of his net worth.

On that issue of Musk’s major shareholding, the (preliminary) Proxy Statement’s main argument that the pay scheme needs to be resurrected is that Musk has received no reward for the extraordinary market capitalisation increase of Tesla over the period since 2018. This absence of any recompense is the source of its argument that fairness requires the scheme to be revived. It does ignore the fact that as 20% shareholder, Musk’s overall wealth increased by more than $100 billion as the value of the business grew from around $55 billion to $650 billion (even for a brief while over $1 trillion) over the life of the scheme. For the board, this share value appreciation is apparently not sufficient to satisfy fairness – though the court explicitly noted it as a reason why setting aside the pay scheme was an equitable remedy.

The (preliminary) Proxy Statement summarises the Tornetta findings but does not directly respond to them. In effect, while the board says it intends to appeal the findings, the proposal to the shareholders is simply to confirm the pay scheme without addressing any of the fairness questions raised by the court. So in order to unpick things more fully we need to consider the Delaware court’s judgement and the evidence that it considered.

The entire fairness doctrine is brought to bear because Musk was found to be a controller of Tesla, and the pay scheme amounted to a conflicted-controller transaction. Such transactions can only be pursued if that is done in an entirely fair way – both the process and the outcome need to be fair. Let’s look at each.

Was the process fair?

While it summarises much of the Tornetta decision, the (preliminary) Proxy Statement provides none of the detail of the questions raised about the independence of the individuals charged with leading the ‘negotiations’ on the scheme.

It’s important to note that while the Delaware court reflects evidence about the question of directors’ independence, it reached no absolute conclusion on this point directly because it found that the entire fairness doctrine applied because of its finding that Musk is a controller of Tesla. It did, however, make findings about whether the directors were beholden to Musk. Investors are likely to draw conclusions regarding independence from the court’s finding that directors were either “beholden” to Musk or “acted beholden” to him with regard to the pay scheme.

The court sums up its finding about the effective independence of the board in the pay scheme process: “Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all.” The form and shape of the pay scheme were largely what Musk had suggested to the chair of the compensation committee at the start of the process, with only minor amendments over the time between that and its approval.

These directors’ main go-between to Musk, who also drafted most of the documents the company leant on to argue that its decision-making was fair, was Tesla’s general counsel. This individual, Todd Maron, was Musk’s former divorce lawyer who held back tears both during his deposition and at trial, in discussing the pain of his 2019 departure from Tesla, and the depth of his positive feelings about the company and its executives.

The Delaware court makes clear that the process of developing the pay plan, including a precipitant timetable, and then a slightly slower but still aggressive timetable, were driven by Musk, not by the committee. The court raises significant doubts as to the independence of the process by which the proposals were tested on institutional investors as they were progressed (for example, it states: “the script reads like a loaded questionnaire intended to solicit positive stockholder feedback and not a method for gaining objective stockholder perspectives on a potential new plan”).

The court also found key gaps in the proxy statement disclosures on which shareholders based their decision to approve the 2018 plan. These included failures to disclose questions about independence of directors from Musk, the nature of the discussions of the plan (particularly their origin as a proposal from Musk himself), and the ease with which Tesla believed it could achieve the operational targets (they were instead stated to be “very difficult to achieve”). Investors were not fully and fairly informed by the 2018 proxy statement, so their approval of the pay scheme isn’t sufficient to overturn the findings of unfairness.

The process was not fair, in multiple ways.

Was the outcome fair – essentially, was the quantum fair?

Musk set the scale of the pay scheme award, initially calling for 15% of the company in 1% increments and then later seeking 10% on a fully diluted basis. The board chose 12% because it preferred to calculate based on issued shares rather than the more complicated diluted basis. No one throughout the process seemed to question this order of magnitude of award. Again, this was not a fair and independent process, but is the outcome, the quantum, fair?

Looking at the current circumstances provides helpful context on this. Musk seems again to be directing matters, including directing the scale of any future awards. In the (preliminary) Proxy Statement, Tesla states that Musk has indicated he would expect any replacement incentive, should the current proposals fail, to be of a “similar magnitude to the 2018 CEO Performance Award”. Oddly, it is clear from the rest of the discussion of the potential costs of such a possible award, that this doesn’t mean a similar order of value in dollars, but an award of the same number of shares: 303 million (at least, this is the equivalent number of shares following repeated share splits). This would have a value at award date of around $25 billion rather than the value at award date of the 2018 award of a still extraordinary $2.3 billion (according to the (preliminary) Proxy Statement, $2.6 billion according to the Delaware court).

As a brief aside on that slight discrepancy in the reported fair value at grant of the awards ($2.3 billion or $2.6 billion – though what’s $300 million between friends?), one of the key interventions by compensation committee chair Ira Ehrenpreis, who was leading the board’s supposedly independent working group on the pay scheme, seems telling. The court reports “a request from Ehrenpreis for “creative options” they could employ to “solve for getting a bigger discount” on the publicly reported grant date fair value”. This appears to be one of the drivers for the unusual (at least in the US context) five year holding period for the shares. The sense that the numbers presented to shareholders were subject to manipulation to put the proposals in the best light, rather than presented fairly and straightforwardly, seems strong.

The Delaware court states (my emphasis added): “With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan.” The mooted replacement award would be 10 times larger than this, i.e. more than 2000 times the now-increased median.

Oddly though, the Delaware decision reports that at trial, Musk stated “unequivocally that he would have remained at Tesla even if stockholders had rejected a new compensation plan”, because of his heavy investment in the company “both financially and emotionally”. And the Delaware court reports that there is no evidence that the compensation committee even considered the question of whether additional pay for Musk was needed, given his existing share ownership in the company; this question was put to them belatedly in the process by their compensation consultant, but apparently not discussed. “The most curious thing about this question is that there is no evidence that any director deliberated over it, and it did not appear in any other Board or committee materials,” the court states.

Even though the board’s stated intent was to keep Musk as a fully engaged CEO, the terms of the pay scheme in fact permitted him to stand down to the role of chief product officer.

So this extraordinary quantum of award was not necessary to retain and motivate its recipient, and it was not in practice designed to do so. There was no negotiation over quantum, nor even any real discussion of it. In these absences, the quantum cannot be said to be fair.

Broader applications of fairness

Investors shouldn’t place too many expectations on this case for setting broader precedents on the willingness of the US courts to intervene on matters of executive pay. The judge states that “A board of director’s decision on how much to pay a company’s chief executive officer is the quintessential business determination subject to great judicial deference.” The entire fairness doctrine was triggered in this case by Musk’s dominance of the board’s decision-making. Even in a market where corporate culture facilitates unusual dominance by corporate leaders, Musk’s position at Tesla is unusual.

Instead, at most US companies, the burden of determining what is and isn’t fair will remain with the board, and with investors. The Delaware decision may lead to a little more circumspection among US corporate boards, but it won’t lead to a transformation.

Instead, we will need to continue to rely on investors to try to hold the line on what level of executive pay is fair. As I’ve discussed previously, many don’t have a great record on that. And it’s notable that the Tesla case itself was not sparked by any institutional investor; rather it was brought in the name of an individual, Richard Tornetta. Institutions should be grateful to Tornetta, to the collective tune of over $50 billion, for raising questions about the pay deal. The case was legally a derivative action, so that while it was brought in the name of a single shareholder it was actually carried forward in the name of the company itself, on behalf of all shareholders, and the value of the decision accrues wholly to Tesla.

What might the investor approach be to the forthcoming AGM?

Investors will be faced with a number of key resolutions at the AGM, now set for June 13.

Investors will have to decide whether they can support the re-elections of the board. This may be particularly challenging given the court’s finding that directors are either “beholden” or “acted beholden” to Musk in relation to the pay scheme. The two directors up for election (Tesla being one of the unusual companies in the US with a so-called classified board, meaning not all directors stand for election each year) are James Murdoch, whom the court found to be “beholden” to Musk given their close personal relationship, and Kimbal Musk, Elon’s brother.

The second key decision at the AGM is the plan to shift the domicile of Tesla from Delaware to Texas. The so-called ‘independent Special Committee’ also worked on this resolution. We are told this proposal is not as a fit of pique because of the Delaware court decision, though Musk polled his X (ex-Twitter) followers on the domicile question almost immediately after that court decision. The board takes up 40 pages of the (preliminary) Proxy Statement to explain the detail of its entirely independent thought processes which have ended up in making the same proposal to shareholders as Musk had asserted the company would following the 87% support of his poll of followers.

Given how effective the Delaware court has just proven to be in protecting shareholder interests, it would be surprising if institutional investors welcomed a move to the unproven corporate law jurisdiction in Texas (as the Proxy states, “Texas’s business courts were just created and will not start hearing cases until September 2024”). Further, those shareholders who care about the existence of multiple share classes and the differential voting rights often associated with them may be interested to note that the draft articles of the intended Texas reincorporation include the creation of a separate class of preference shares, with the board having explicit powers to determine all characteristics of these shares as and when issued, including voting rights (Tesla currently only has one share class). Investors will need to consider if they trust this board to exercise that broad discretion fairly and well.

There are a number of shareholder resolutions, perhaps most notably one considering the Tesla policy on freedom of association and collective bargaining, and one regarding anti-harassment and discrimination efforts.

But inevitably, the main focus of attention will be on resolution 4, which seeks to reinstate the Musk pay scheme. While the proxy statement sets this up as a battle of fairnesses, in perhaps a first for this blog, I suggest that shareholders – at least institutional investors – do not in fact need to think about fairness when considering this proposal. They just need to think about their fiduciary duties.

It seems to me impossible to understand how any investor motivated by fiduciary duties can vote in favour of the proposed resurrection of the pay scheme. Whether it was right in the first place – and the court’s holding that it was not entirely fair is robust, and oddly unchallenged in its details by the Tesla board – the proposal now is to make an award to an individual for value that has already been created (and some of which has since dissipated given more recent share price falls). The proposal will create no new value for shareholders, rather it is simply to give money away for no benefit. That is not a fiduciary-led decision. While it is still called a 100%-performance linked award, there is no performance still to be delivered.

The clients to whom those fiduciary duties are owed may well seek particularly robust justifications from any fund manager that decides to vote in favour of making a gift – especially such a sizeable gift.

One further unfairness?

As a final brief comment, at some time this summer (most likely), the Delaware courts will assess the fees due to Bernstein Litowitz Berger & Grossmann LLP for their work on the Tornetta case. The law firm has claimed around $5.5 billion for protecting shareholders from the cost of more than $50 billion through the pay scheme; that is calculated by looking at percentages of awards previously allowed as costs for lawyers, but is clearly an extraordinary sum (it amounts to some $275,000 for each of the near 20,000 hours apparently worked on the case). Whether the courts – and shareholders – regard this as fair, let alone entirely fair, remains to be seen. The (preliminary) Proxy Statement notes one benefit of the reinstatement of the pay scheme as being that this legal cost would not be faced; whether that’s true, and whether it is sufficient justification for the board’s proposal, seems highly debatable.

The Gini in the executive pay bottle

The unfairness of dual class shares

I remain happy to confirm that the Sense of Fairness blog is an entirely personal endeavour.

Tornetta v Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699, Delaware Chancery Court, January 30 2024

Tesla preliminary proxy statement (PRE 14A), Securities and Exchange Commission, April 17 2024

Bernstein Litowitz Berger & Grossmann LLP on Tornetta v Musk

Tornetta v Musk is the Rule of Law at Work, Holger Spamann, Harvard Law School Forum on Corporate Governance, February 27 2024

The Bill comes Due, Ann Lipton, Oxford Business Law Blog, February 2 2024

Deaton’s economics: fair criticism?

It is remarkable that the International Monetary Fund, one of the bastions of our modern economic construct, should be so willing to test and challenge current economic thinking. But that is what it does in publishing a striking short blog by respected economist Angus Deaton. Deaton is best known for his remarkable work on the US epidemic of what he has dubbed deaths of despair and he also led a recently-completed eponymous review of inequality for the Institute of Fiscal Studies. Deaton offers what amounts to an apologia for modern economics, and suggests some routes that may be more productive for the future. Not only might they be more productive, I would suggest that they are also likely to be fairer.

In the blog, Deaton questions mainstream economics. He does so from a remarkably mainstream position. He won the Nobel Prize in 2015, and is a professor at Princeton. His criticism of the failings of current economics, and not least of current economic education, should therefore hit home.

The core of Deaton’s points are made in crisp discussions under a handful of bullet-point headings. These are: power, philosophy and ethics, efficiency, empirical methods and humility (doesn’t our entire world need a whole lot more of that last?). He comes most crisply to his point in the first of these: “Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.” But the bullet points reflect a continuity of thought, not separate ideas. He complains at the loss of ethical thought from economics and its replacement by an emphasis on efficiency and a simplifying focus on the financial: “We often equate well-being with money or consumption, missing much of what matters to people.”

Under efficiency, he states:

“Many subscribe to Lionel Robbins’ definition of economics as the allocation of scarce resources among competing ends or to the stronger version that says that economists should focus on efficiency and leave equity to others, to politicians or administrators. But the others regularly fail to materialize, so that when efficiency comes with upward redistribution—frequently though not inevitably—our recommendations become little more than a license for plunder.”

I think that quote bears rereading.

Applying these five approaches as a new lens for approaching questions, Deaton reaches a range of fresh conclusions – or rather a reduced level of certainty – about a number of different issues. These include: unions, free trade, global poverty and immigration.

But though it is not among these bullet-points, or the issues about which Deaton now has less certainty, to my mind one of the most notable single words in the piece is ‘efficacy’. Deaton says: “today we [economists] are in some disarray. We did not collectively predict the financial crisis and, worse still, we may have contributed to it through an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought.” Normally economists and investors talk about market efficiency, and certainly the financial crisis was in part due to overconfidence that markets are efficient, that they will find the right prices for things. The efficient market hypothesis – which many investors take as a certainty, even though it is merely an hypothesis, and even though there would be no ability of active investors to outperform if it were true (admittedly many are more lucky than genuinely generate outperformance, but nonetheless it is still possible to outperform a market). The crisis showed that market pricing can often be very wrong and the use of market prices as a foundation for valuations can be risky.

Deaton is clearly referencing the Efficient Market Hypothesis (and the use of ‘efficiency’ as one of his bullet-point headings makes more notable his decision not to use the term in his comment about the disarray of modern economics), but he is actually making a very different point. He is asking whether markets are always efficacious, whether they work and always add value to human society. And his clear view is that they are not always, and do not always. We should listen, particularly those of us who work in financial markets.

Deaton has never minced his words, but here he is remarkably cruel about his profession. He says he does not want to get into the question of corruption among his peers, though he notes that allegations “have become common in some debates”. But he does state, bluntly: “economists, who have prospered mightily over the past half century, might fairly be accused of having a vested interest in capitalism as it currently operates”. In a blog that clearly has real concerns about the operation of modern capitalism, that fair comment is one that should hang over the profession, challenging all to rethink with the confidence and honesty that Deaton has.

Is enough enough? Addressing the problem of the super-rich

“To make the poor richer, you have to make the rich poorer.”

It’s one of the bolder early assertions made in a new book, Enough: Why it’s time to Abolish the Super-Rich, from my friend Luke Hildyard, who leads the High Pay Centre, the think tank dedicated to considerations of pay and employment rights. Given the hours he put into it, he’ll hate that I note it’s a short book, but that means it is a quick read – which its brisk and energetic style greatly assists. It includes extensive references to the evidence of academic and other studies, but Hildyard doesn’t let them weigh down his central messages and arguments.

Much of the book is dedicated to demonstrating the truth of this early assertion. Beyond that, Enough also aims to show that there would be benefits from a more equal income and wealth distribution and that much current income and wealth is unearned and undeserved. It argues that it is possible to address the issue of the super-rich, both politically and practically – but that at present the political will isn’t there and the social pressure for change isn’t yet great enough. “The super-rich are tragically unloathed,” says Hildyard in one of his typically crisp and blunt phrases.

As is perhaps obvious, this is a polemic, using vigorous and direct language to make its points – and it is none the worse for it. It’s also funny. I didn’t expect to laugh out loud at the book, but its dogged pursuit of a thought experiment of carpeting the nation in £5 notes is only one among its amusing moments.

Hildyard also charts a path for addressing the issue of the super-rich, one part of which would be wealth taxes. That particular path became potentially much easier just yesterday when a UN committee of tax experts agreed to develop a clear map for it: the Committee of Experts on International Cooperation in Tax Matters approved guidance for the creation of wealth taxes. This will not be called a ‘model law’ but rather an ‘example law’, but the intent is clear, and the idea of international cooperation in this area is aimed to reduce incentives for individuals to move to avoid such tax burdens. We’ll see how far these proposals progress in practice.

There is clearly some political will, and indeed some general willingness to engage in these issues. If the interest shown by those seeing me reading Enough on public transport are anything to go by, this is a book whose time has come. I would certainly heartily commend it. It was formally published this last week.

In many ways, vigorous and blunt as it is, Hildyard’s language is less hardline than others’. For example, the authors of the wonderful Spirit Level, Kate Pickett and Richard Wilkinson, both professors of epidemiology at York University, recently wrote a comment piece published in venerable journal Nature entitled Why the world cannot afford the rich.

As well as noting the disproportionate greenhouse gas emission impacts of the lifestyles of the wealthy (as previously noted in this blog), Wilkinson and Pickett state: “large differences in income are a powerful social stressor that is increasingly rendering societies dysfunctional”.

They continue:

“bigger gaps between rich and poor are accompanied by higher rates of homicide and imprisonment. They also correspond to more infant mortality, obesity, drug abuse and COVID-19 deaths, as well as higher rates of teenage pregnancy and lower levels of child well-being, social mobility and public trust.”

Most strikingly, the epidemiologists argue that “Even affluent people would enjoy a better quality of life if they lived in a country with a more equal distribution of wealth”. They complain about the wastefulness of unfair distributions: “Inequality also increases consumerism…Studies show that people who live in more-unequal societies spend more on status goods.” It’s certainly clear that this is happening. For example, ultra-luxury carmaker Bentley recently revealed its financial results, making revenues of €2.9 billion on sales of just 13,560 cars (or over €200,000 per vehicle), with margins improved by a record of nearly 10,000 of those vehicles including personalised features costing upwards of €40,000. For these buyers, it appears, it’s not enough to be able to buy a car that costs more than many houses. They also want the additional status of a still more expensive and truly unique vehicle.

The wealthy also buy other trappings of status – like the arts building branding that was part of the focus of the Sackler family in deploying their immoral earnings from Purdue Pharma’s role in the opioid crisis, or political donations. Evidence shows that rarely are such gifts really generosity – something is expected in return (as the reliably brilliant Tom Burgis amply shows in his excoriating new book Cuckooland). Sadly, rarely do the super-rich now feel the need to be genuinely generous in sharing their wealth in the ways their predecessors in earlier generations did. Alms houses are among our most beautiful old buildings, mostly built by our wealthy Tudor or Victorian forbears, but there seems to be no modern equivalent being created now.

This urge towards status skews our whole business sector. When you now look at the market capitalisations of major businesses, it is notable how much more valuable are the luxury goods companies that cater to the demands of a tiny minority than those that provide much larger markets with less luxurious versions of the same products. Germany’s Porsche is valued at more than $90 billion and Italy’s Ferrari (actually listed in the Netherlands to benefit from rules allowing unequal voting rights) is touching a valuation of nearly $80 billion; Ford and General Motors hover around the $50 billion mark, while producing orders of magnitude more vehicles. In a similar way, the valuation of Hermes (around $270 billion) is nearly double that of Inditex, whose major brand is Zara (valued at some $150 billion). The mass market isn’t where the money is made any more: even collectively, the centre doesn’t hold as much spending power.

Pickett and Wilkinson capture their findings in a striking chart that sets the Gini coefficient measure of inequality against an index the authors created of environmental, health and social issues (including measures such as air pollution and recycling; infant mortality, life expectancy, and obesity; and educational attainment, teenage births, social mobility and trust). As they say, “There’s a clear trend, with more-unequal societies having worse scores”:

As an earlier editorial in Nature raged, Reducing inequality benefits everyone — so why isn’t it happening? Essentially, that’s the challenge that Hildyard is attempting to rise to, and he provides some useful answers, and relevant solutions, as well as amusing challenge to the status quo. Do we need to make the rich poorer in order to make the poor richer? Probably, yes. The greatest political challenge on this issue though is likely to be defining what amounts to ‘rich’ or ‘super-rich’ for these purposes. One hindrance to action may be that definitions of what is too much are hard to draw. It’s hard to build a coalition of the willing among those who fear they may be next to face reductions (even if intellectually they might accept the idea that they would benefit from less inequality), and that – for the present at least – seems to limit the political pressure for change.

Hildyard himself blurs these lines, at times railing only and specifically at the truly (absurdly) super-rich, the billionaires, and at other times focusing on broader wealthy groups, including all public company bosses, top lawyers and bankers, and anyone earning in the top 1%, or having wealth among the top 1%. He quotes income of £183,000 and wealth of £3.7 million for the UK, and $400,000 and $11 million respectively for the US, as placing people into the respective 1% groups. These are huge numbers, clearly, but not close to being in the same league as the billionaires. A focus on a loosely defined super-rich elides this challenge – and while Hildyard demonstrates just how much might be available from the individuals at the very top of the income and wealth distributions, were they taxed more effectively (a simple function of their extreme wealth), he leaves open the question of seeing changes lower down the income levels too. This doesn’t undermine his arguments, but clarity is likely to be helpful in garnering political support and leveraging real change.

Hildyard ends the book saying:

“Indeed, it will be impossible to achieve our full potential to build a fairer, happier, more prosperous society without a major rebalancing of incomes and wealth. This ought not to be a question of partisan ideology – the logic, feasibility and urgent importance of the issue are clear. It is time to abolish the super-rich.”

I’d argue that all of this but the final sentence is unarguably true – that last sentence probably remains open to some debate, not least as to where the threshold for super-richness lies.

As the phrase goes, the poor are always with us. It is less clear that the super-rich need to be.

The centre cannot hold

As ever, I am pleased to confirm that the Sense of Fairness blog is a purely personal endeavour.

Enough: Why it’s time to Abolish the Super-Rich, Luke Hildyard, Pluto Press, 2024

Subcommittee on Wealth and Solidarity Taxes Guidance as of 1 March 2024, UN Committee of Experts on International Cooperation in Tax Matters

Why the world cannot afford the rich, Richard Wilkinson, Kate Pickett, Nature 627, 268-270, 12 March 2024

The Spirit Level: Why Equality is Better for Everyone, Kate Pickett, Richard Wilkinson, Penguin, 2010

Highest Levels of Personalisation Drive Second Best Financial Performance on Record for Bentley Motors, Bentley, 19 March 2024

Cuckooland: Where the Rich own the Truth, Tom Burgis, HarperCollins, 2024

Reducing inequality benefits everyone — so why isn’t it happening?, Nature 620, 468, 16 August 2023

Unfairness fuels conflict: fraying threads

Perceived unfair treatment is a driver not just of resentment but of outright conflict. Unfairness destabilises our world.

That’s the clear conclusion of some recent research by an IMF economist and a professor at Rice University in Houston in the US. Their focus is sub-Saharan Africa, a region with disproportionate levels of conflict and human suffering, whose violence fuels emigration and so more instability elsewhere. But it seems sure that while there unfairness fuels outright military conflict, the logic must be that in other parts of the world unfairness will drive unrest and discontent in different forms. The researchers refer to “conflict-inducing alienation”. That alienation can be seen in many countries of the world, not just sub-Saharan Africa.

But sticking first with their area of focus, the blog that accompanies the launch of the paper summarises the researchers’ findings:

“While various factors can fuel conflict, our research shows that discontent with state institutions among marginalized groups is a key driver of unrest in the region. Such distrust reflects perceptions that governments fail to address equity issues and inclusive growth—including the fair allocation of natural resources and human capital development… Poverty and underdevelopment alone may not fuel conflict. But those underlying factors are exacerbated by the experience or perception of social and economic exclusion, thus providing a fertile breeding ground for armed groups, necessitating urgent intervention.”

These countries in sub-Saharan Africa are of course among the first to experience the most brutal impacts of climate change, and this exacerbates the experiences of those at the edges of society. “Climatic fluctuations and food insecurity have been particularly acute in this subregion,” the paper reads. “Forecasts for 2023 indicate that nearly 142 million individuals in the region will confront acute food insecurity.” It should not be a surprise that “Food insecurity contributes negatively to trust in government.” Also unsurprisingly, the desperation that arises from this hunger drives individual actions, especially among those who have lost trust in governments. It must of course be noted that much of the poverty in the region is a legacy of colonialism.

The consequences of this are stark. Essentially, there is a close correlation between the sense of exclusion and unfairness and the fragility of nation states and their susceptibility to conflicts of various forms. This chart from the paper illustrates the finding well:

The researchers conclude:

“Our findings show that the crisis of confidence experienced by marginalized groups towards state institutions is the primary driver of conflict. This crisis of confidence originates from the perceived failure of state institutions to safeguard interests, ensure justice, promote human capital development equitably, oversee fair allocation of natural resources, and encourage inclusive economic growth. Such institutional failures, contributing to perceptions of social and economic exclusion, invite conflict as they undermine the principles of fairness and inclusivity vital for sustainable development.”

These findings emphasise the importance of the Rule of Law in fostering trust in government and so in building the foundations for economic growth and investment. And there is a clear need to foster the basic expectations of a cohesive society in order to lean against these perceived unfairnesses: “These results suggest strongly that governments in the Sahel G5 as well as sub-Saharan Africa more broadly should focus their efforts on improving the quality of their institutions (reduce corruption and improve law and order) and provision of public goods (healthcare, education, air and water quality, food and shelter sufficiency) rather than focus primarily on macroeconomic variables such as the levels of economic growth and unemployment.”

The sense of being forgotten and left behind by government and wider society is greater for those at the geographic edges: “conflict is often concentrated near national borders where there tend to be more limited or insufficient public services, fostering feelings of exclusion”. Many of those national borders were drawn with the arbitrary straight lines of empire.

That sense of living at the periphery, having been forgotten by government and wider society, is of course not unique to people in the countries of sub-Saharan Africa. Many in all the countries of the world now feel left behind and peripheral. In sub-Saharan Africa these frustrations appear to be reflected in outright conflict but in other parts of the world the same sense of abandonment has inevitable, if different, consequences. The consequential violence can fuel crime, it can drive social division and anger in and with politics, but these are just other forms of the violence and dislocation that comes from people feeling that society no longer operates fairly to protect their interests.

Perceptions of fairness seem to be vital to hold states and their people together in peaceful coexistence.