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Labour’s 7 steps to ‘responsible capitalism’

Labour leader Ed Miliband now has the first outline of his “responsible capitalism” agenda after a Labour-commissioned report into short-termism in UK business.

Ed Miliband Labour Conference 2012 480

Last year Labour hired former Institute of Directors director-general Sir George Cox to develop policy ideas on how to create sustained economic growth.

Cox’s report, Overcoming Short-termism within British Business, calls for an overhaul of the UK tax regime, a shake-up of company reporting standards and radical new rules on buying shares of firms involved in takeovers.

MIliband first described his idea of responsible capitalism at the 2011 Labour annual conference when he divided firms into producers or predators and encouraged long-term thinking in business.

Here are the seven key Cox recommendations that will now inform Labour’s policy review process and its 2015 general election manifesto:

1. Taxation

Capital gains tax should be moved back to a taper system, moving from 50 per cent in the first year to 10 per cent after 10.

Liability for tax on dividends could be reduced, in a series of yearly steps, from the prevailing rate of income tax in year one to 0 per cent after year ten.

2. Small firm finance

Stamp duty for Aim-listed shares should be abolished to boost investment and liquidity in small companies.

Tax on dividends on Aim-listed firms should taper down from the income tax rate to zero in five years instead of 10.

Venture capital trusts and enterprise investment schemes should be boosted. Restrictions on EIS should be lifted to allow large shareholders in firms and employees to invest in them too while VCTs should be enhanced as their impact has been “disappointing” since their creation in 1995.

All financial incentives and support schemes for small firms should be reviewed to establish their effectiveness and impact.

3. Takeovers

Investors who buy shares after a takeover bid has been made should have no voting rights, creating two categories of shareholders for a period.

4. Company reporting

Quarterly accounting should be abandoned so firms don’t have the urgency of facing shareholders every three months with their books laid bare.

Firms must include a clear description of their long-term strategy with progress updates of long-term goals and action taken to pursue them.

5. Executive pay

A large share, say 30 per cent, of an executive director’s pay should be deferred for five years and tied to long-term performance.

Half of non-executive director’s pay should be paid in shares that do not vest until they have left the firm or after five years, whichever is first.

6. Employee shares

Employee share incentive plans should be widened to encourage wider ownership. For example, in addition to £3,000 in shares firms can award they should be allowed to take up 10 per cent of their basic salary of £5,000 whichever is low, subject to the same restrictions and tax benefits.

7. Financial regulation

There must be an urgent investigation into the effects of current financial regulation, especially EU and international, in promoting short-termism.

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