In the 19th century economists portrayed business as a perpetual struggle between capital and labour. So far in the 21st century labour has been losing this battle in the west – on the lower rungs, anyway. As China and India have embraced capitalism, so wages of blue-collar workers in the developed world have stagnated.
Meanwhile corporate profits as a proportion of gross domestic product have soared to historic highs, thanks to the outsourcing of production and technological advances that eliminate the need for many personnel. But there are plenty of parts of the economy where this trend does not apply.
Indeed, in a number of industries the entire enterprise appears to be directed towards enriching senior staff – while capital providers receive scant returns.
Take professional football clubs. Managers and star players essentially take all the prizes, while shareholders almost invariably lose money. Stories of corporate insolvencies of soccer clubs are legion – from Leeds United to Leicester City. I can recall a former owner of Everton telling me that buying it was the worst decision of his career. He not only lost money but had fans spit at him and hurl bricks through his sitting-room window. Football clubs are essentially charities run for the financial benefit of staff.
Another sphere where the top talent takes a disproportionate share of the gains is investment banking. Every year billions in bonuses are paid out – even when many firms make vicious losses in downturns such as the subprime write-offs this year. Banks such as Bear Stearns, Citibank and UBS have even been forced to seek rescue funding on punitive terms. But the gorgeously remunerated top executives never truly suffer. The occasional sackings are cushioned by luscious pay-offs. The key traders, asset managers and deal-doers have somehow rigged the game so as to siphon off a distorted slice of the action – even as dividends are cut and share prices slump.
The entertainment industry is also plagued by low corporate margins and fantastically paid stars. Actors, directors, singers, writers, producers and agents get richer while studios, broadcasters, publishers, music labels and other media companies find the going ever tougher. It is difficult not to feel a touch of sympathy for Guy Hands at EMI, having to deal with the Black Hand Gang, a consortium of pop group managers who look after acts such as Robbie Williams, Pink Floyd and Coldplay. Music artists appear to make out like bandits, while battered old EMI struggles to produce margins of 5 per cent on its record label as billions of tracks are illegally downloaded. In Hollywood the writers are out on strike because they want the lion’s share of the proceeds of the digital revolution – even if it bankrupts the media majors.
Often talented individuals can bend companies to their will because of the myth that ideas and celebrity are what create value. In truth, execution is what matters. Lots of people can imagine something original – a film, a song, a financial structure. Yet those concepts need investment and must be put into action and marketed. Almost all large undertakings are the work of hundreds of able bodies, all striving to deliver the goods.
Intellectual capital is much more dispersed than the distribution of the surplus would indicate. Possibly top managers at banks, music companies and football clubs allow themselves to be captured by wily operators. And many corporate executives implicitly link their pay and benefits to the escalating rewards seized by the “special” talent. So this merry-go-round of excessive remuneration actually suits the custodians of shareholder wealth.
Traditional, capital-intensive sectors such as manufacturing are less prone to the Winner Takes All disease. Britain’s economy is scarily dependent on the sort of service industries where the talent can hold companies to ransom. Owners and executives have a duty to ignore such behaviour and invest in young up-and-comers rather than greedy established players. There is plenty of brilliance out there, although many headhunters would argue otherwise – because they too are on the gravy train.
It takes courage to confront the demands of an expensive safe bet and try someone new, but frequently it is worth the risk.
The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity firm
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