by Malcolm Simister
Strangely, a different presentation of income statements may help to stem the rise of populism around the world, which is democracy at work.
Relief felt the world over about the election of Joe Biden as the next United States’ president should be tempered with the realisation that, despite everything, Donald Trump still received a record number of votes in the election. This may encourage populism elsewhere, too, so it’s important to address its underlying causes to prevent further destructive, short sighted, small-minded and narrow-minded decision making based largely on ignorance.
There’s a lot more to it, but one of populism’s main cause seems to be that for the last couple of decades in western democracies, the wages of the average person have barely risen while those of the ‘elite’ have skyrocketed. This has led to resentment, even in the US where belief in self-help and self-advancement is high. I’ve spoken to well educated, well paid Australians who are resentful too and neither they nor I are intent on bringing down capitalism. In fact, quite the reverse, capitalism needs to adapt to survive.
My belief, mis-quoting Winston Churchill, is that capitalism is the worst economic system ever invented, apart from all the others that have been tried from time to time. (He actually said that about political systems and democracy). No one has yet invented a better system (certainly not in China) so we’d better make it work.
I’ve written previously that a more equitable distribution of the spoils is necessary to reduce resentment and allow tolerance to flourish again. The question is how to achieve this without heavy-handed government intervention and without stifling innovation, risk taking and entrepreneurship.
One way may be for boards of directors to be elected not solely by shareholders but for a percentage of them to be elected by employees to look after employees’ interests in the context of the interests of the whole company. This raises many questions such the split of shareholder and employee-elected directors but my hope is that this would lead to a more equitable distribution of wealth between shareholders and employees and the profit retained by the company for investment. Each company would decide what is an appropriate share for each group.
Whether this would actually lead to an income distribution equitable enough to satisfy the great majority of people would only be determined in practice but the stakes are so high – democracy and business are currently on the nose – that it’s surely worth a try.
And this is where the presentation of the income statement comes in. Broadly, income statements are shown as revenue – costs = profit. However, this can be restated to show revenue – costs incurred from suppliers = the value added and then show how that value added has been shared between shareholders, employees and the amount retained in the company.
Further, the remuneration of the senior executives should continue to be disclosed and also, as required of listed companies in the UK, their salary shown as a multiple of the company’s average employee remuneration. In the UK, the average CEO’s salary is more than 100 times the average wage. There, the average CEO is paid more in the first few days of the year than the average person makes in the whole year. Is this acceptable? That’s not for me to say but for each company to work out. But I think we need to take action, soon.
The title of this article is taken from a song in the musical Les Misérables, ‘Do you hear the people sing? Singing a song of angry men’