Fat Cats: creaming off profits

“Fat Cats” were on the news agenda already – the shareholders of GlaxoSmithKline (GSK) had voted the previous month to not allow a £22 million severance scheme for the director of their company. News items had been filled with images of the little people standing up to the corporate monster – complete with tweedy little old ladies and retired majors venting their frustration at the iniquity of directors remuneration packages growing as the value of their shares dwindled.

Similar resolutions at the general meetings of the HSBC bank and Corus, the steel firm, failed, with large institutional shareholders voting down the myriad small-holders. In the latter instance, the TUC noted in a press release that the workers at that company are under threat of pay freeze or even redundancy.

The trade unions have been banging on for years about “Fat Cat” pay. During long years of wage restraint the TUC and trade unions have complained about “inflation busting” pay rises for top executives. How, they ask, can freezes on the wages of a company’s employees be justified when directors are merrily awarding themselves massive pay packages, at many times the going rate of inflation (which is what most workers’ pay rises are held to)?

Many see condemnation of the “Fat Cats” as an old left, radical position, a useful bit of demagoguery. Clearly, it doesn’t hurt Labour every now and again to voice concerns over “Fat Cats”, especially so long as they hedge it, as the Trade and Industry Secretary did, in terms of supporting the rewards of success. All of this is a gift to the Tories, who are no doubt preparing “politics of envy speeches” at this very moment.

The problem, as can be seen by anyone who takes a moment to examine the way in which capitalism works, is that taking on the “Fat Cats” is emphatically not a radical position. It is, rather, taking sides in a dispute between capitalists and their lackeys on the boardrooms of their corporations. That is, there is no gain to be had from any of this for the workers – were the “Fat Cat” fees to be slashed, the ones to gain would not be the workers, but the shareholders, the capitalists who actually own the companies.

As Marx pointed out in Volume III of Capital, shares are not real capital, but “a share of the stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it”. That is, share certificates represent a title to a share in the profits to be derived from capital that has already been invested in the form of the assets of a given company. These shares have no intrinsic value themselves, but can be assigned one based on the amount of income they represent. That is, the dividends – payments due to share holders – amount to a specific return on the magnitude of the share value, and should that income rise or fall, the nominal value of the shares will rise and fall accordingly.

Large companies are in competition with one another to attract new shareholders (through the issuance of new shares), and existing shareholders want to see the value of their initial investment rise. Thus, companies have to ensure that the size of their dividends is competitive compared to the general market. If the returns on the shares in a specific company are higher than in the general market, demand for them will rise, and their putative value will rise accordingly. Thus, the ratio of return will remain roughly the same as that on shares in other companies.

This means that, to stay in business, the board of directors of a firm must pay dividends on a regular basis. A good example of this was the failed Railtrack railway owning company in Britain, which managed to find funds for its shareholders dividends, despite not raising a commercial profit. It managed this largely by selling off assets, mostly land and facilities. The board of directors also has the unfortunate responsibility of setting the pay for its members.

Share in surplus value
As Hewitt’s consultative document shows, this process is regulated by legislation on the pay of directors. The members of boards of directors are chosen by, and normally from amongst, the shareholders to administer their affairs for them and in their interest. That is, they act of behalf of the absentee owners, who have now become utterly redundant to the supervision and reproduction of their own capital accumulation let alone to the actual process of production. Someone does not become a capitalist purely by dint of being the managing director of a capitalist firm. However, the possibility exists – through the position of being in practical control of the companies – for the directors to arrange affairs so that they may cream off some of the profits that would otherwise go to the absentee shareholders.

In the case of most directors it is not a free market that sets their “pay”, i.e., their share of surplus value in return for managing the affairs of the other shareholders. They apply networks of association to restrict access to the jobs, and then set one another’s pay. They have a number of means by which they can supplement the appearance of receiving a set salary. They pay each other bonuses for performance, which they get automatically, no matter how they have performed. They get share options, the right to buy shares at a future date at a set price, which will usually be less than the going market price (giving them an instant windfall). They get, as they tried to get at GSK, severance packages that ensure massive payments on departure.

These directors use control over the process of exploitation to secure a share in the surplus value produced. The source, ultimately, of capitalist profits is the difference between the price of product of labour, and the cost of hiring the specific types of labour involved in realising it. That is, between the value of the work we do, and the cost of maintaining and reproducing our capacity to do that work. That is, the profit falling to capital is set by the conditions in the labour market which regulate how hard they can make employees work, and how much they can pay them. Once that profit has been realised, there is no essential mechanism determining how that profit is divided among the various members of the capitalist class.

This becomes a matter for legal and contractual relations between capitalists, as they use a variety of rights to secure their share of the profit, with landowners securing rent, financiers securing interest, etc. Each takes a profit from the total of surplus value extracted. In the case of stock held companies, the shareholders take their share in the form of dividends. The board of directors are able, in this circumstance, to use their position, to secure whatever profit remains after the dividends have been paid out.

In effect, the directors are swindling the shareholders, taking a share in their profits, based on the fact that they aren’t in a position to control the directors effectively. Hence why it is shareholders who are leading the attack against “Fat Cats” – they understand that it is their money that is paying those salaries, it is their profit that is supporting the half million pounds or more a year for a top corporate director. It is, for all its apparent radicalism, a spat over who gets the booty, who gets what share of the unpaid labour of the working class.

These facts are reflected in the craven pro-shareholder outpourings from the TUC on this subject. In their press release “TUC join with Dutch and German unions against excessive executive pay”, they maintain that “business legitimacy is being eroded as Europe’s citizens are shocked by further examples of this new creed of greed” and that “too often in recent years it has seemed that executives regard companies as vehicles for self-enrichment rather than for the creation of wealth for all stakeholders” which they interpret by asking “are these excessive executive pay arrangements in the interests of shareholders, and likely to lead to wealth creation?”