Voting with your wallet is the ultimate consumer power

The Labour party leadership believes that income inequality is far too high.

As socialists, they think of income as centrally distributed, like slices of cake at a birthday party.

Top company executives have seen sharp increases in pay in recent decades, so in Labour’s view, that means less sponge and icing for workers. The cutter has been divvying up the cake unfairly.

According to Jeremy Corbyn and his team, then, the burgeoning gap between average company workers’ earnings and executives is not, as many economists believe, a symptom of globalisation, returns from education, or any other factors.

No, seen through this left-wing prism, inequality is an injustice that we wrongly tolerate, and which we can act upon.

And try to act is what Labour fully intends to do. Each week there is a new front in Corbyn’s desire to level things up. It is not just higher minimum wages or promising more taxes on the rich – policies that have been a staple diet of the left for many years. The party increasingly reaches for radical corporate governance reform too.

Labour wants to establish workers (read: trade unions) on company boards, and for workers to be granted shares in their companies. Both, the party believes, will help curb executive pay inflation.

Yet a new mooted idea from a Labour-commissioned report last week went much further still.

The brainwave from Professor Prem Sikka and others is that, for companies with 250 or more employees, consumers should be given a binding vote on remuneration packages, alongside shareholders and employees.

These votes would have teeth. If more than 20 per cent of combined “stakeholders” voted against a firm’s remuneration report in two consecutive years, it would trigger a resolution at the AGM, which could lead to re-election for company directors.

This raises a litany of obvious practical questions.

Presumably, someone who once bought a pack of chewing gum at a Tesco Express couldn’t rock up and vote on Tesco’s executive pay. So what or who defines a true “stakeholder” consumer, rather than a one-time customer or someone associated with rival companies?

The report talks of using loyalty cards and direct information provided in the banking and utilities sectors. But there is no obvious robust principle.

Then there are unintended consequences, as indicated by business pressure groups.

Major firms are often themselves large consumers from downstream suppliers. Should large businesses therefore have voting rights on the executive pay of the smaller companies they buy from? If so, what effect might that have for competition?

But legitimate as these practical arguments are, they fail to tackle the real problem with this idea: the rationale for the policy is based on two fallacies.

The first myth is the notion that businesses do not care for “stakeholders” already.

In fact, every business is constantly dealing with difficult, multifaceted decisions: trying to deliver goods and services that people want to buy, considering their long-term brand and reputation, selecting and rewarding executives for their leadership, all the way through to trying to keep employees motivated and happy.

This is difficult enough to juggle while trying to make a profit. Adding in the need to second-guess what a group of activist customers might do to the pay packets of your chief executive increases these difficulties.

But perhaps the most pernicious fallacy is the idea that customers have no power over business today.

As the late economist Lionel Robbins noted, far from currently not having a say: “every day thousands of people cast their votes for the hundreds of products and services on offer, and from the competition to win their votes, better and better products and services arise”.

When we are unhappy with companies, including over the pay for their executives, we have the most powerful vote of all: to stop buying their product. This is a real power that can make or break a company.

Self-evidently, ordinary customers just don’t really care about the pay of chief executives as much as the left-wing intellectual class or the Labour party, or those companies under fire would be going out of business.

Labour’s proposed policy is therefore unlikely to result in scores of genuine consumers lining up for their voice to be heard.

What is far more likely to happen is that these votes will become a vehicle for activist socialists. Bestowed with neither specialist knowledge of the firms’ aims nor skin in the game, these egalitarians will be free to influence decisions that could profoundly impact the future direction of businesses.

If you think that high executive compensation packages are overly large cake slices and that reducing inequality is what matters, this might seem wise.

If, on the other hand, you think that executives can make or break a company, one should have more faith in consumer choices and shareholder decisions.

Consumers already have the power. The Labour party just doesn’t like how they are using it.