Corporate governance, shareholder value and worker rights Simon Deakin Law/CBR PPSRI, ‘Understanding Inequalities’, Cambridge,

Piketty hypothesis The decrease in inequality in developed economies between 1919 and 1970 was only temporary and is being reversed War and economic shocks caused inequalities to fall during the twentieth century There is no natural tendency for capitalism to lead to reduced inequality in either the developed world or in developing economies

Piketty’s fundamental laws The share of capital in national income is a function of the rate of return on capital multiplied by the capital/income ratio (i.e. the ratio between capital stocks and income flows): α = r x β The capital-income ratio is equivalent to the savings rate divided by the growth rate: β = s/g Assuming a stable savings rate and a slowing rate of global output, the dynamic law β = s/g predicts that the global capital/income ratio will continue to rise

Acemgolu-Robinson critique: institutions matter Piketty ignores institutions, or deals with them in an ad hoc way Institutions shape the r-g relationship Close study of country-level histories and institutions better explains inequality trends than ‘general laws’

Shareholder value ‘Greed is all right, by the way... I think greed is healthy. You can be greedy and still feel good about yourself’ (Ivan Boesky, Haas School of Business commencement speech, May 1986) ‘Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind..’ (Gordon Gekko, Wall Street (1987))

Labour market flexibility ‘You’re fired’ (Donald Trump, The Apprentice, 2004) ‘Laws created to protect workers often hurt them’ (World Bank, Doing Business, 2008) ‘Employment regulations are unquestionably necessary not just to protect workers from arbitrary or unfair treatment but to ensure efficient contracting between employers and workers’ (World Bank, Doing Business, 2015)

‘Leximetrics’ Coding of changes in company and labour law over time Shareholder and creditor protection: 30 countries, Labour law: 117 countries, Publication on CBR website, June For existing data see: projects/completed-projects/law-finance- development/#item-2

Shareholder protection laws

Change in indicators over time

Laws governing part-time, fixed-term and temporary agency work

Employment protection legislation

Pooled mean group estimation: different forms of employment

Pooled mean group estimation: EPL

Conclusions Institutions do matter, and politics can affect relative inequalities Growing inequality in developed countries is linked to changes in corporate governance including increased legal protection for shareholder rights since 1990s Legal protection for workers’ rights over the same period has mitigated growing inequality but has not been able to reverse it We can get reliable measures of institutional change