The Financial Times published an alarmist front-page story about Labour’s Inclusive Ownership Funds proposal over the weekend. The headline of the story is that “UK’s Labour would cost companies £300bn by shifting shares to staff.” The paper then goes on to quote some right-wingers saying that this will be devastating in various ways. But in reality, the proposal, if implemented, should be fine.
Labour’s IOF proposal is pretty simple: every year, for the next 10 years, large British companies will be required to issue stock equal to one percent of their ownership to trusts established for each company. Those trusts will operate on behalf of the workers in each company, meaning that the workers will be able to vote the shares in shareholder matters and receive up to £500 a year in dividends from the shares (with the surplus above £500 flowing to the government). The IOFs are a twist on the “funds socialism” approach to socializing ownership of capital, which was popularized by Rudolf Meidner in 1970s Sweden.
The Financial Times determines that this proposal would “cost companies £300bn” using some rough calculations that say the market cap of large British companies is £3 trillion, and 10 percent of that is £300bn:
The ONS estimates that financial and non-financial corporations have a book value of £5.5tn. The national accounts do not separate out large companies, but 57 per cent of overall corporate turnover derives from large companies, according to the ONS. On that basis the value of large private sector companies is about £3tn — meaning Labour would expropriate £300bn.
The first problem with this coverage of the program is that it is deceptive to say it will “cost companies.” The IOF proposal does not require corporate entities to pay out any cash to the funds and does not in any way reduce their book values. All it does is require the corporations to issue new shares and give them to the IOFs, just like many corporations already issue new shares and give them to top executives as a form of executive compensation.
Issuing new shares will increase the total number of shares in circulation and therefore reduce the value of each share relative to the counterfactual where you did not issue those shares. Thus, it makes sense to say that the IOFs will reduce the market value of existing shares by 10 percent, but it does not make sense to say this will “cost companies £300bn.” At most you can say it will “cost incumbent shareholders £300bn” by diluting out the value of their shares by that amount.
In addition to mixing up shareholders and companies, the FT gives room to right-wing ideologues to provide unsubstantiated speculation about how Labour’s IOF proposal will mean doom and gloom for the national economy.
Instead of publishing impressionistic comments from think tankers, the FT should have contextualized the proposal using the hard-nosed market-data-driven approach it is generally known for. Specifically, it should have asked a simple question: what would it mean to investors if you required companies to issue shares equal to one percent of their float every year for 10 years? How would this actually affect their bottom line relative to the status quo?
In beginning to think about that question, the natural place to start is to look at returns on UK equities over the last decade. During that time, the FTSE All-Share index shows an annualized total return of 8.14 percent. This means that anyone who invested £100 in a fund tracking the UK stock market in 2009 saw that investment grow to £218.70 at the end of last month. Had the IOFs been in place, and gradually diluted out 10 percent of that, the amount at the end of the period would have instead been £196.83. The lost £21.87 of value would have found its way into the IOFs.
What this calculation shows is that, even with the IOF scheme slowly diluting incumbent investors out, those investors still would have nearly doubled their money over the last decade. Obviously future returns might be lower, but the point here is that the practical effect of the IOF is that it cuts the rate of return a bit for incumbent investors for the 10 years in which it is requiring share issuances. This does not present any kind of obvious problem. Investors can survive a decade of returns being, say, 4 percent instead of 5 percent. They really can. It’ll be fine.