Both ownership of gross fixed assets created and share in market value of companies point to a lower share of wealth transferred to the ‘people’ as against family-owned or private business.
One good that emerged from Thomas Piketty’s Capital in the Twenty-first Century is the debate that got triggered on inequality. The diktats of capitalism had dominated economic thinking since the turn of the century, and the concept of economic Darwinism caught on. The 2008 financial crisis exposed the fissures in this landscape—greed was then no longer considered good, and it was felt that there needs to be better governance when it comes to compensation to corporates. Piketty’s tome is built on these tenets, and goes back through the ages to make the point that inequality had generally increased over the period.
It is, however, hard to quantify this concept when the economy in question is as complex as India’s. Data is available only for select areas, and the levels of accuracy are questionable given the dominance of the unorganised sector. But, within corporate India, it is possible to pose this question and see the trends based on data from annual reports. This can be one measure of inequality. Piketty has always distinguished between inherited wealth and that which was earned where the former had a distinct advantage. At another level, he does use data to show that even in the contemporary world, corporates were to blame for inequality where they paid themselves large sums of money in the name of management pay that came through both cash and stock options. As a result, even after the financial crisis exposed management wrong-doings at many companies, this set of people had already made their money and hence never quite lost—unlike shareholders whose wealth was wiped off.
Three aspects are looked at here, based on annual report data, to assess the level of inequality, the key metric being whether it has increased or not. The first is ownership of assets (measure of distribution of wealth), the second’s the market value of shareholders (share of market rewards) and the last is the share of salaries in overall income (share of labour in value added). Two points of time have been chosen—2007 and 2017—to assess whether inequality has gone up or not in the span of a decade.
A sample of 3,826 companies selected has been classified under four categories by ownership—private, MNC, public and family-owned. The limitation here is that the concept of public limited company is fuzzy, where a family-owned company will also be having non-family members as shareholders even as their own share in the company can be in the region of 25-30%. But the company is associated with the family name and operates under this franchise. The idea is to see if there has been any change in the pattern of wealth, measured as gross fixed assets and market capitalisation, across these segments. The accompanying graphic depicts the results.
The graphic shows that, in a decade’s time, the share of the family-owned companies increased by almost 10 percentage points, to 44.1%, while that of government-backed entities came down by around 12 percentage points. The shares of the MNCs and non-family private sector increased. Therefore, it does appear that, in terms of ownership of assets in the country—valued at `42 lakh crore—the largest share went to the family-owned companies.
Next, to the story on market capitalisation, which is the value of these companies (around `106 lakh crore). Here, too, family-owned business maintained its share in the cake. However, the value of wealth of PSUs came down. This means that the government companies had lower valuation in the market, which also means that all the disinvestment that had taken place in the market was unable to actually prop up the market cap as the perception of being ‘public-owned’ militates against higher valuation. This also means that the wealth to the general public, which is what PSUs represent, came down. In case of private companies and MNCs, the shares went up.
Both the indicators point to a lower share of wealth transferred to the ‘people’ as against family-owned or private business. The part on gross fixed assets supports the Piketty concept of inherited wealth increasing in terms of dominance. The third variable is the share of salaries in total profits, which is defined in terms of profit and loss account components of ebitda plus salaries and wages—the value added. A higher share of salaries would mean that labour is getting a higher share which is an income equaliser in the broader sense. Here, a sample of 2,350 companies for these two points shows that the share increased from 24.4% to 29.1%, indicating that there has been an improvement.
There is, however, a caveat here: The salary referred to includes also the payment to the top management on which one does not get details from annual reports. This is what Piketty had referred to when he spoke of managements of companies taking the larger share of the pie, pleading better performance—this is acceptable in a capitalist world. Annual reports are quite opaque on this front, and do not provide information on the shares of top brass in overall compensation bill for companies. A possible approach is to look at the revealed information on the board of directors published for, say, the Sensex companies to get an idea of what part of total bill is attributable to the top brass—only the working directors and not the independent ones who get sitting fees. While this number too would not be right as it is influenced by higher or lower denominator, it is still interesting. The accompanying graphic gives the frequency distribution of the shares of the board management in total compensation for 24 companies in the Sensex that are in the private sector.
The highest share of top board level management was 7.3% that, surprisingly, was in the private sector. The others with above 2% share were expectedly in the family owned companies. The banking sector had the lowest ratios with the software firms, where a high numerator was balanced by very large employee compensation outlays.
The conclusions that may be drawn have to be put in some perspective. There is a definite tendency of a good level of concentration of wealth with the ‘inherited wealth’ class that has evidently built on wealth with a lot of effort—and this is commendable. The fact that their share in market value is unchanged also reflects probably fair valuation. The fall in the share of the public sector is significant and reflects the diminishing value of this sector. Counter-intuitively, it can be said that, in the case that initiative was not taken by the private sector, wealth creation would have been slower.
However, the second part of the story is revealing as there has been some sings of top management taking a higher portion of the total salary payouts. Now, whether or not companies could have continued to create value without such handouts is a matter of conjecture.
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