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Building a better capitalism

John Denham

 

Addressing the challenges of the squeezed middle, the British promise, and fraying communities will need an economy that looks and feels very different to today’s.

 

Across Europe the centre-left has suffered defeat after defeat. Former support has swung to populist parties, nationalist parties or the greens – that may sound familiar.

The old reason for voting social democrat – getting a good deal for workers in a market economy by restraining the private sector – became harder as wealth creation stuttered. The replacement strategies – adopting liberal economic policies; investing in supply-side measures like skills; and redistributing the tax receipts – have run their course of effectiveness.

The result is the three challenges Ed Miliband has set out (Miliband, 2011a):

  • the squeezed middle – that large group of people working on low and middle incomes who feel that the rewards of hard work, paying taxes and playing by the rules are too little, in contrast to both those who enjoy stellar salaries not matched by results, and those who claim benefits too easily;
  • the British promise – the nagging and deep-seated fear that our children will not enjoy better lives than we have done because we cannot pay our way in the world;
  • strong communities – recognising the myriad ways, including changing workplaces and working lives, we sense our communities with strong social institutions and common bonds are being eroded. 

Our election demands credible responses to those challenges. And that means an economy that looks and feels very different to today’s: stronger in more sectors; globally competitive to pay our way in the world; offering fair rewards and creating shared prosperity; underpinning not undermining a strong society.

Labour’s Business and Enterprise Review was launched in March. Months of intensive consultations with businesses, large and small, across the country, have helped shape our understanding of the challenges facing British business in the coming years. There is no doubt our review covers many of the critical economic, social and political issues underlying Ed Miliband’s three big challenges.

While we have world class companies and huge potential, too little of our economy is globally competitive, across too few sectors of the economy. As Ed Balls has warned, the years of lost growth which George Osborne’s fiscal reduction strategy look set to inflict on the UK may be lost forever as the BRIC countries and others invest heavily. Our domestic economy has too many low wage, poor productivity jobs. We have an economy that simultaneously experiences both skill shortages and many people working below their capability and potential productivity. In turn this puts pressure on public policy attempts to compensate for a poor labour market.

Our economy must be more broadly based. It has to become more competitive in those key sectors where today and in the future we have the opportunity to be globally competitive in order to pay our way in the world. It needs to be better balanced, not just between the financial and other sectors, but between the regions and nations of the UK.

 

Why it matters

At a time when last year’s recovery has been choked off – with yet more disappointing GDP Q2 growth figures of just 0.2 per cent – it might seem churlish even to ask these questions. Surely, as the current government has argued in allocating the Regional Growth Fund to immediate job creation rather than any strategic purpose, any job is better than no job?

But while we have to be concerned about people having a job, we must also be concerned about what that job is. In the medium to long term, the nature of the growth and the jobs we create is crucial to the overall success of the economy and to those who work in it. Otherwise both the country and its families face a bleak future. The Resolution Foundation, using projections from the Office for Budget Responsibility, has estimated that median gross real wages adjusted by RPI are set to be lower in 2015 than they were in 2001 (Plunkett, 2011). The Governor of the Bank of England has talked of living standards falling for six years (King, 2011).

And this is not just because of the global banking crisis and our stuttering recovery; though it is being made worse with the living standards squeeze of George Osborne’s VAT hike and higher inflation under this government. For middle and lower earners (the squeezed middle), wages stagnated long before the crisis, from about 2003. According to the Resolution Foundation between 2003 and 2008, average earnings fell by 1.1 per cent across the UK despite GDP growth of 11 per cent over the period. In eight of nine English regions, the falls were bigger than that (Plunkett, 2011). The economy was creating three million jobs; jobs at the highest skill levels, yes, and at the lowest skill levels, but hollowing out the jobs in between.

The difficulty of developing more, higher skill, higher value added jobs, and the long tail of less productive, less efficient business, hampers our attempts to be internationally competitive. But there are political and social challenges here as well.

Labour believes that people who work, pay their taxes and play by the rules should be properly rewarded. If work does not bring that reward, the state is under increasing pressure to step in. Ultimately the costs, and hence the tax burden, of compensating for poor jobs could continue to rise – whether through tax credits to top up wages, or through benefits and employment services for those who revolve in and out of low paying, insecure jobs. Using the state to compensate for the increasing failures of the labour market feels like running up the down escalator. No government can protect all its citizens from an economy which is simply not producing enough productive, decently paid jobs.

And work is central to our lives. For our incomes, our ability to pay our way, to raise our families well, to secure our retirement. And for much more: for the lives we build around it; the friendships we make; the way we are valued; the ability it gives us to develop our skills; to get on; the respect and autonomy we enjoy.

In a free society with a free economy, that’s surely the deal. Yet the evidence suggests that our economy is not offering those rewards to millions of people who may have jobs but who do not have decent work. Serious questions have to be asked about our economic model if, year after year, it is not raising the living standards of the majority; it is questioned if it undermines, rather than underpins, family life and the strength of our communities; if there is no challenge to the idea that a narrow view of markets must always trump the richer values of human relationships and the broader social meaning of work.

You don’t have to predict Greek-style disturbances to recognise that both politics and business are surely going to run into trouble if the best we can offer is years of falling living standards, followed by growth whose benefits are as unfairly shared as they have been in recent years.

So can business and politics together offer something better?

  

Supporting private sector growth

In building a different and stronger economy, the growth and jobs we need will be private sector growth and private sector jobs. The next Labour government will need to have a relentless, single-minded focus on creating the conditions for private sector growth. That means creating the conditions in which companies compete within fair markets and make profit by being the best in those competitive markets.

The Tory-Lib Dem notion is that support for market-led growth means that the ideal state is one in which government does as little as possible. In truth, markets are inevitably and unavoidably shaped by what governments do, and by what government doesn’t do. The powers of government go way beyond establishing the right fiscal conditions for the macro-economy, or supply-side measures like investment in skills and infrastructure.

Indeed, without the effective use of all the tools available to government, supply-side measures cannot have their full impact.

  • Government policies determine to a significant extent the size and shape of key domestic markets, the sectors which attract investment, and the opportunities to ensure that research is exploited to develop successful companies with new products which can achieve success in world markets.
  • Government policies can shape the balance between short term pursuit of profits and the long-term growth on which greater profits and greater tax income can be based.
  • Government can create market certainty or uncertainty. For years, uncertainty about nuclear power depressed investment in nuclear technology and nuclear related skills. As certainty grew, private investment grew and investment followed in the skills and technologies we need.
  • Competition and pricing policy in energy can determine which technologies attract investment, and determine the opportunities for domestic companies to develop new and internationally competitive strengths in green technologies.
  • More generally, competition policy will set the balance between the smaller and the larger company – between banks and small businesses, between supermarkets and farmers, between the innovative insurgent company and the established market leaders.
  • Government procurement will play a significant role in deciding whether the benefits go only to established companies, or whether there is a guaranteed flow of funds – albeit on a small scale compared with overall investment – which can provide the opportunity for new and innovative companies, technologies and services.
  • Government regulation can create markets for new businesses and new solutions, as the establishment of the 3G standard for mobile phones gave the European mobile phone industry a significant market advantage over its rivals in other countries. The establishment of a target for zero carbon homes fostered whole new markets across a range of business activities – from architects to building technologies, from renewable energy supply to carbon offset mechanisms, and the demand for new skills – which would not have otherwise existed.

When Vince Cable told the Financial Times that ‘growth is not something concocted by the state’ (Cable, 2011), he was speaking both a self-evident truth, and demonstrating a profound and dangerous misunderstanding of how the most competitive economies will succeed. Government cannot substitute its own activity for the growth that must come through the numerous decisions of private sector entrepreneurs and businesses. Nor can, or should, governments try to pick and foster individual companies for protected and special treatment. But they can and should act as enablers and shapers of the conditions for that growth.

Governments also shape the institutions which support private companies. One of the tragic side effects of the bungled reform of higher education finance is that so many vice chancellors have been diverted from forging the business links and knowledge transfers which are so vital to growth, to trying to work out how to survive in the new regime. In considering the future structure of banks, we will need to look at whether competition alone will meet the longstanding gap of long-term finance for regional economies and smaller companies – the Federation of Small Business has called for regional equity funds to help SMEs. Can we learn from the USA and European countries how public and private together can create successful new lending institutions?

At the heart of an activist approach to business and enterprise policy is the recognition that, used wisely and intelligently, these areas of government influence can be used to create the markets which foster the successful companies, in the key sectors, which we need. It means understanding what business needs, and making sure that public policy is properly aligned, properly coordinated, to deliver the confidence and certainty business needs. 

 

Redesigning government

As a government Labour came late to the idea of an active industrial policy. We paid a price in an economy too heavily dependent on financial services; too vulnerable to the global crisis.

But in the last few years we began to identify some key industries which needed a defined framework. We worked with business to define long-term objectives, to create infrastructure, to meet objectives and to attract investment.So we established the National Composites Centre to maintain a lead in a key technology for aerospace. We developed a technology-neutral low carbon policy for the motor industry through the Automotive Council. We created a strong framework for renewable energy including offshore wind and photo-voltaics. We began to flesh out a broader vision of what the UK economy should look like in the future.

The Tory-led Coalition is engaged in a badly managed retreat from government activism. The government has scrapped Regional Development Agencies (RDAs), the strategic investment fund and grants for business investment, while it has effectively cut regional funding by two-thirds. Sure, a plethora of Labour legacy initiatives remain in place, but the strategy is in disarray. The National Composites Centre exists but without the commitment to a forward looking aerospace programme. The Defence Industrial Strategy – which gave defence contractors certainty about future military and technological demands – has been abandoned as Defence Secretary Liam Fox buys off the shelf, and BIS shows no great interest in what these companies should now do. The Automotive Council continues, but the RDAs which could have helped make a reality of the ambition to strengthen supply chain companies no longer exist.

In March, David Cameron stood with Bombardier UK Chairman, Colin Walton, and he said:

I am bringing the Cabinet to Derby today with one purpose – to do everything we can to help businesses in the region create the jobs and growth on which the future of our economy depends. (Milmo, 2011)

The decision to award the £1.5 billion contract for new Thameslink Trains to Siemens means Bombardier is set to review its activities in Britain, putting at risk the jobs of its 3,000 permanent and temporary staff, plus countless more in the supply chain. The economic impact on Derby of losing the contract was not even part of the government’s assessment. What is needed is a long-term capital plan to create certainty for UK companies and give them the best chance of succeeding in the future, instead of a stop-start programme of occasional announcements that leaves manufacturers unable to plan ahead; longer, larger contracts or supply arrangements, more common designs across different types of trains. These are the issues that Maria Eagle is wrestling with in Labour’s transport review.

The government let it happen. We must make this a turning point in industrial policy. No longer should good jobs and skills be lost because our government doesn’t have the procurement policies, the industrial policies or the leadership to enable UK companies to win orders in fair competition.

Given that Vince Cable repeatedly called for the abolition of the old Department of Trade and Industry, it’s perhaps no surprise that he is leading a weak department which shows no sign of understanding the potential power of intelligent government activism to shape the economy.

I have set out the many ways in which government shapes markets for better or for worse, and not just through investment and grants. The challenge is to understand and make best and conscious use of these market shaping mechanisms.

 

The need for vision

Of course we can’t predict the future. But governments and business together can anticipate some of the key challenges, and the capabilities, the technologies and the resilience which gives us the best chance of success.

We can expect markets that are likely to be:

  • greener – as businesses play their role in meeting international climate change obligations; and more sustainable as resource shortages demand more efficient use;
  • more hi-tech – as new technologies are developed and exploited. For those dependent on them, low-tech industries will create wealth for a limited period only;
  • increasingly digital – as the full potential of Web 2.0 is better understood, and there is rapid development towards versions of Webs 3 and 4.0 – Tim Berners-Lee’s ‘semantic web’ of machines understanding the meaning of digital content, or an ‘internet of things’ where everyday objects can talk to each other; 
  • more globalised – with greater access to developing markets just a click away, not just for global corporations, but also for SMEs. Markets will be much bigger as global incomes rise, and much smaller too, with millions of niche markets.As Lord Battacharyya recently warned, in the expanding global marketplace, ‘the rewards for being first mover and the penalties for being slow will grow exponentially’.

Despite publishing a growth plan which is already being re-written, there is no sense that this government even aspires to create, with business, a credible vision of our future economy. No vision for the low carbon economy, advanced manufacturing, life sciences, business services, the digital and creative and educational sectors – sectors in which, with financial services, we can aim to compete in tough global markets. That vision, backed by active government policies, is central to growth and reshaping our economy.

It’s obvious really. People invest to make money. Everyone prefers a safe bet. Risky money is more expensive money. Uncertainty about public policy; confusion about what Britain’s economy will look like in the future; fear that policy will change arbitrarily and unpredictably: all these deter investment or make it more expensive. Countries with clear public policy, clear economic goals, and reliable policy are attractive places to invest. So investment is either more expensive here; or goes elsewhere.Not just to different companies in different countries; but within subsidiaries of global companies able to choose where in the world to be.

Where certainty is needed, there is confusion. Where leadership is called for, none is given.As former CBI Director General Sir Richard Lambert has pointed out, UK companies have built up cash surpluses equivalent to six per cent of GDP. But in the absence of a coherent and compelling government vision for growth, it lacks the confidence to invest it. He lambasted the ‘lack of clarity on strategy’, the ‘contradictory signals’, the ‘planning delays and red tape’. These were ‘inhibitors’ to investment in key sectors.He said that the government should be giving clear priority to sectors such as aerospace, financial services, and pharmaceuticals, where the UK has a competitive advantage and ‘which depend in part for their success on Whitehall policies. The government should make it clear that over the long term it stands ready to do whatever it takes to sustain the UK’s position in these areas.’

This is not, fundamentally, about money. It’s about clear direction, industry priorities, strategic action, certainty; about willing the means as well as the ends.It’s not just capital investment that hangs on this vision. Without a story of future opportunities, how can we inspire and motivate our children and influence their choice of study or training? It’s making the vision a reality which can renew the British promise.

If the Tory Coalition won’t deliver that vision, then Labour must.But then be in no doubt: we will have to change the way we did government. It may be obvious that confidence and certainty attract investment.But business tells us that the words ‘confidence’, ‘certainty’ and ‘government’ do not always sit easily together.

The government machine makes little effort even to understand the costs of uncertainty.

Uncertainty over a Heathrow third runway delayed investment for years. Only now can BA be confident that they should invest in Madrid instead. Drugs companies get mixed messages; hugely supported in research but finding the NHS an often hostile or difficult partner.

It’s subtle. Changing investment incentives to improve them may actually deter investment – because it reminds investors that policies can change. The anger of the oil and gas industry at George Osborne’s budget raid is not just its immediate, narrow impact, but the fear that if dramatic policy changes can be made without consultation once, they can be again. Suddenly the North Sea is a much more dangerous place to invest.

In fact, the Tory led coalition is providing a master class in deterring investment through uncertainty.

 

Investing in decarbonisation

Decarbonising the UK energy sector alone will require investment of more than £200 billion. To encourage this scale of investment in new low carbon electricity generation requires policy certainty.

In government Labour established a legal framework for the transition to a low carbon-economy, through the world leading Climate Change Act. As Climate Charge Secretary, Ed Miliband used the legal framework to mandate an 80 per cent cut overall in carbon emissions by 2050. ‘From 2009’, he said, ‘carbon budgets will take their place alongside financial budgets, and become pivotal to policy decisions within the UK’. Through the legal framework and credible mechanisms for marking progress, Labour created policy certainty. It encouraged investment, and helped energy intensive industries towards a lower carbon future.

In 2009 the UK was ranked fifth globally in low-carbon technology investment and development.Since the election, we have slipped to thirteenth. The Pew Environment Group ranking blamed the fall on ‘a sharp decline in offshore wind energy investments and uncertainty surrounding [government] policy’ (Harvey, 2011).

Ed introduced feed in tariffs to encourage households and businesses to install renewable energy sources. The Coalition cut the money available then dramatically changed the policy to make solar photo-voltaic installations generating above 50kW largely unviable. The Renewable Energy Association described this as a ‘horrendous strategic mistake’ (Renewable Energy Association, 2011).

From January 2009 to December 2010 employment in the Solar PV industry rose from 3,000 to 10,000. Without the February review, this number was expected to grow to 30,000 during 2012. Now investors are backing off. Senior lenders – West LB, RBS, the Cooperative Bank, Rabobank – are now unwilling to lend capital to UK solar power projects. Triplepoint has shelved its interest in solar projects, including its planned £100m Solar Income Fund until there is ‘greater clarity’ over policy.Matrix has suspended its clean energy fund. LCI has shelved investment plans for large solar photovoltaic projects. Triodos Bank is reconsidering solar farm investments. County Council pension investors looking to back renewables have had to put their money elsewhere.

In 2006 Ruth Kelly announced that all new homes would have to source their energy from carbon-neutral sources. This simple regulation created whole new markets – in architecture, building technology, skill training, renewable energy generation and building management. The innovation it stimulated has made UK firms in this sector world leaders. Earlier this year, Vanke – one of the largest houses builder in China – agreed a £100m investment deal with green building experts BRE for an innovation park in Beijing to showcase British design, materials, construction products and technologies for sustainable homes.

The March budget cut the target by a third. Chief Executive of the Green Building Council Paul King called it a ‘shocking weakening of thegovernment’s green agenda which would remove a valuable stimulus for low carbon growth’. It undermined ‘a remarkable consensus between industry and NGOs’ and would result in a ‘loss of confidence leading to lower investment, less innovation, fewer green jobs and fewer carbon reductions’ (UK Green Building Council, 2011).

The cancellation of the Severn Barrage has caused an industry hiatus. Wave and tidal technology is at a crucial stage – about where wind was a decade or so ago. The UK is at the forefront in developing potentially world leading technologies. In government we supported this through the Marine Renewable Deployment Fund and Marine Renewable Proving Fund. Now this investment risks being undermined, and the future rewards and jobs going elsewhere.

The floor price for carbon has been changed from being a smart tax to encourage lower carbon technology to a straight forward tax-grab, raising £1.4 billion in 2015/16. But in the absence of any clear plan to help energy intensive industries like steel and the process industries it may simply export emissions as industry leaves our shores.

The transition to a low carbon economy will be central to any vision of Britain’s future; sustainability and jobs at home; environmental justice abroad; paying our way in the world. Instead, the coalition has made it an object lesson in deterring investment and damaging growth

Why?

  • because cutting the deficit too far too fast means giving a priority to cutting investment incentives and destroying confidence; 
  • because short term politics on petrol prices was more important to George Osborne than long-term investment in the North Sea; 
  • because the Tories and Liberal Democrats think reducing regulation always encourages growth when sudden change actually punishes investors
  • because if you don’t believe in the active role of government in shaping markets, encouraging innovation, and supporting business success, then you won’t make best or conscious use of the tools that you have.

But Labour must recognise the implications for our policy review. For all that business is queuing up to criticise the Coalition, they are by no means confident that we are consistently better. We were not immune from the sudden politically determined policy change; or the political but investment deterring delay in decision-making.We did not use all the tools at our disposal well.We could not claim to have put creating a climate for confident investment at the heart of all our decision-making.

The main criticism of an activist approach to business policy is not the principle, but the fear it would be done badly and make things worse. It will require fundamental changes to the way government works. The current Whitehall machinery is not fit for purpose in a modern economy. It has too little understanding of the business implications of its decision making. It can be too slow to decide,too wedded to dogma, too weak to ensure that ministers understand the implications of decisions they are about to take.While better policy is important to the policy review, no less important is a long, hard look – with business – at how government can be redesigned to meet the needs of business. 

 

Good companies

The third major issue emerging from our early policy review is the role of companies themselves in the UK economy and how they determine the quality of growth and jobs we need.

The competitive UK economy that can succeed in the future would surely be employing more, and more highly skilled, people more productively. There is, surely, a reasonable chance those people would find their work, and their rewards from it, more satisfying. Yet, despite the apparent benign coincidence between the type of economy we need and the one many of us would wish to work in, it is equally self-evident that we are not yet achieving it across our economy.

This is why we need to look at the companies, the real businesses that provide the work we do and will do. It is in companies, in real businesses where people at work come together with the challenge of making and selling competitive goods and services. People don’t start and run businesses to boost the nation’s ‘global competitiveness’. People don’t work for something called ‘the economy’; they don’t work in something called ‘the labour market’. They work for individual institutions, companies, each with its own leadership, culture, purpose and organisation. If better jobs are to be created, rewards shared more fairly, and innovation encouraged, it will have to happen within individual companies. This is where the key decisions are taken.

All companies exist to make profits. But the best companies rarely describe their business only by how much money they make. When Michael Taylor, Operations Director of Fosters Bakery in Barnsley, and member of our Business Review Advisory Group, says his aim is to be the best baker in Britain, he is saying a lot about what drives him and his business model. Fosters Bakery has trained every member of its staff to level 2 or above. Good business? Yes. Being the best baker is the activity which drives the profits. But good to work for as well. And good for our wider society.

We will not create strong communities unless the workplace is part of it. Unless work for most people is a place where you are valued; respected; have opportunities to develop your own abilities to the full; and which gives you a fair chance to provide for a secure future and bring up your children. Despite this, policy-makers of left or right have not given enough thought to why companies behave the way they do. Nor to whether governments can do more to encourage what I would call ‘the good company’.

 

British business at a crossroads

Throughout the last six months, I have been struck by the sense that British business stands at a crossroads, both in the way it thinks about and it conducts business.

In one direction lies the belief that the purpose of business is short-term pursuit of profit, even at the expense of sustainable, long-term business growth. In that direction goes the banking leader who told Britain’s families to get over the banking crisis when its real impact on their lives, incomes and public services, had only just begun. Fellow travellers are the companies who don’t train and don’t invest in the workforce.

That way lies the assumption that because outsourcing may be cheaper because wages are lower the customer will not notice if services are delivered by the unsuitable or the uncaring; or the irresponsibility of investors in Southern Cross who managed to separate their financial interests from the very purpose of the company itself; or the uncritical, irresponsible acceptance of boardroom pay that has grown out of any relationship with real company performance; or the irresponsibility of asset stripping financiers, cashing out the value in brands built over decades, even centuries, to make a quick buck: every British company up for auction every day.

You can find plenty of companies – too many – that fit that profile. But there are many other increasingly insistent voices in British boardrooms and beyond who argue that a different model of business is better for business, and for wider society. They include Aviva, PwC, GSK, GKN, DESSO, Rolls Royce, Unilever and many more. And it’s not just large corporates, either, but voices like Michael Taylor’s and other SME business leaders on our review like Deb Leary and Angela Maxwell.

These voices are reflected by a strong movement amongst economists. Commentators like John Kay who argues that goals we may have – including maximising shareholder value – are best achieved indirectly (Kay, 2010). A company focused on being the best at what it does is more likely to make consistent returns for shareholders than a company that fetishises shareholder value. Being a good company can also align with the consumer preference – as the RSA’s Matthew Taylor says: ‘customers want a good deal; companies want a good margin, but they can also be engaged in a joint endeavour’ (1).

The Harvard professors Michael Porter and Mark Kramer argue that the principle of shared value could give rise to ‘the next major transformation of business thinking’. It is ‘not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success’. They point towards evidence of efforts to create shared value from ‘hard-nosed’ companies such as ‘GE, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and Wal-Mart’ (Porter and Kramer, 2011).

There can be different models. For the Co-operative Group, the UK’s largest mutual, owned not by private shareholders but by almost six million consumers – with a £13.7 billion turnover – purpose as well as profit is integral to its operation. As its mission statement says ‘Like any business we want to be a commercial success. However, even more important to us is the way that we do business, and the way that we use our profits’.

Now, the perfect company is no more likely to exist than the perfect political party. No doubt every single one I name can be found to have some serious vulnerability – on its international activities, its professional failings, its environmental standards, its trade union recognition. But even if true, that doesn’t invalidate the central argument that a live debate about the best business models is underway. The Labour Party is clear which side we are on.

Both our economy and our society will be stronger if we have a higher density of companies which: 

  • grow their businesses for the long term, not the short term;
  • are committed to constant innovation and investment;
  • develop the skills of their own workforce;
  • nurture their supply chains;
  • value their customers for the long term not just the short term;
  • are open and transparent with high standards of corporate governance;
  • build sustainability into their core activities;
  • value employee engagement and trade union relationships;
  • deliver fair rewards at every level;
  • show consistency between their behaviours at home and their ethics abroad;
  • see their success as part of a broader, national, success story.

It is companies like that which will deliver a resilient economy that is competitive abroad, fair at home, and strengthens our communities: companies that can compete in global markets; that do behave fairly at home; that do enrich community life.

The question for our policy review is what can be done to make the emergence and development of ‘the good company’ more likely – which immediately raises two fundamental questions: is ‘the good company’ really a better business model than those which pursue short term profit at all costs and eschew all those things I’m looking for? And, in any case, can governments really make any difference to what sort of business models emerge?

It’s hard to argue that market forces alone are so benign that enlightened self-interest leads automatically directly to the ‘good company’ business model. Certainly ‘good companies’ do make money. There are strong arguments that consumers like to know where goods come from; that customers want a relationship of trust with the way a company behaves; that long-term investment pays better over time; that good employers get the best out of the best employees. But bad companies can make money if there are no constraints on their ability to do so. If polluters don’t have to pay, they rarely do so voluntarily. Just like you can’t get a good school without a good head teacher, high quality business leadership is the precondition for a good company.

But our review is concluding that on every aspect of the good company/bad company choice the actions or inaction of government can one way or another help tilt the balance and shape the choice.

The first role of government is to be an advocate – to stand with those who are leading this new wave of thinking, to encourage and to spread the word. We can celebrate those who are already doing it. Stonewall’s Diversity Champions logo has become a badge of pride for companies recruiting. A high ranking in their Workplace Equality Index is much sought after amongst the Blue Chips. A place on The Sunday Times ‘100 Best Companies To Work For’ list is valued by businesses and employees alike.

But government can do more than this. My aim here is not to set out detailed policy prescriptions, but to look at the issues and topics we will want our policy review to tackle as we bring out more detailed work.

 

Favouring the long term

If we want long-term business models we need to favour the long term over the short term. The activist approach to government policy is intended to give long-term confidence in the future shape and capabilities of the economy as we build strength in other sectors. The needed reform of the Whitehall machine to give greater long-term investor confidence has the same aim.

The ability to plan long-term is also influenced by the type and availability of investment and business finance, particularly for the smaller company with real potential to grow. Banking reform, taxation of investment, and the operation of capital markets are key. Andy Haldane and Richard Davies’ Bank of England paper evidences the increasing short-termism in the pricing of companies’ shares, and the historical lack of investment in the British economy, particularly in long-term and high-tech investment (Haldane and Davies, 2011).

Richard Lambert highlights the examples of the 2010 hostile takeover of Cadbury by Kraft, and the National Grid being punished by investors in 2010 for raising money to invest in the long-term infrastructure Britain needs (Lambert, 2011). Merger and acquisition policy may not only reduce important UK companies to global subsidiary status with no great commitment or loyalty, but also undermine far-sighted business leadership. Acquiring companies may fail to add value; they just build empires. Corporate governance must ensure the boards of those companies behave more responsibly so that more patient capital can be protected. The current government has a number of reviews underway in this area. Our review will take full account of their proposals. But it is no secret that there is little or no cross government buy-in to them, and that if radical and sensible proposals are made, it is much more likely to fall to the next Labour government to take them forward.

 

Creating markets for innovation

If government wants companies to innovate they can take steps to ensure markets exist for innovative products and services.

Little of the £150 billion of public procurement each year is used in any conscious way to raise innovative products and services. Too often the emphasis is on the prescriptive; or on the industry standard at the lowest price. Efforts to replicate the US Defence Advanced Research Projects Agency (DARPA) and Small Business Research Initiative (SBRI) have had only limited take up.

And, without public money, public policy can create markets for innovation as we did with the zero carbon homes targets, or in developing markets for renewables, or as the EU did when establishing the 3G standard for mobiles.

 

Frameworks for fairness

Governments cannot mandate pay polices but can set a framework for fair rewards.

Will Hutton’s recent report for the government said tracking pay multiples should become normal practice across the economy (Hutton, 2011). As Ed Miliband highlighted in his speech on responsibility, executive pay levels linked to performance have become detached from what an individual has achieved. The average chief executive remuneration in the FTSE 100 doubled in the last nine years, far outstripping the average share price performance. So shining a light, as Ed has called for – publishing ratios between the highest and median earners – drives transparency and responsibility to deliver fair rewards. He said: 

We must create a boardroom culture that rewards wealth creation, not failure. To those entrepreneurs and business people who generate wealth, create jobs and deserve their top salaries, I’m not just relaxed about you getting rich, I applaud you. But every time a chief executive gives himself a massive pay rise – more than he deserves or his company can bear – it undermines trust at every level of society. (Miliband, 2011b)

The minimum wage was opposed with dire warnings of job losses. In practice, the minimum wage put a floor under business models based on low pay and forced productivity to improve. Some major companies have agreed to pay a living wage, and Ed Miliband has asked the review to look at how a living wage might be incentivised. Living wages, and the minimum wage, had to be campaigned for, and the TUC argues that effective representation in the workplace helps ensure fair pay policies. Employee share ownership schemes have proved a successful way to allow employees to share in the proceeds of growth, and develop a greater engagement with their companies.

So a framework for fair pay might combine regulation, incentive, effective representation and disclosure.

 

Informing consumers

If we want businesses with a mature, open and trusting relationship with customers, consumers must not only have rights to fair treatment and redress but all the information they need to make informed choices.

Fair competition and strong consumer protection are essential. But, as the public reaction to the use of child labour showed, consumers and investors want and deserve far more information about the conditions in which products are produced and sourced; and when they get it, companies change their behaviour. Current campaigns for transparency around taxation or the extractive industries show that continuing demand – the UN’s Protect, Respect and Remedy Framework gives us a good basis for this work – and over the long term, consumer demand to know about the ethical and environmental policies of the companies they buy from will only grow.

Improved disclosure allows consumers and investors to make better choices in fairer markets; it enables markets to operate as they are meant to.

 

Ensuring effective ownership

Companies should ultimately serve their owners, so government should ensure that ownership is exercised effectively.

Governments should back those shareholders who take a broader and longer term view of company success – on its resilience; its investments in R&D; its rewards policy; its people management capabilities; its success in capturing market share – not just on quarterly earnings statements. In the UK, the average period for holding shares has reduced from five years in the 1960s to less than eight months in 2007. Dominic Barton of McKinsey argues: 

If the vast majority of most firms’ value depends on results more than three years from now but management is preoccupied with what’s reportable three months from now, then capitalism has a problem …The most striking difference between the East and West is the time frame leaders consider when making major decisions; having a long-term perspective is the competitive advantage of many Asian economies and businesses today. (Barton, 2011)

Britain’s public companies are ultimately owned by pension and other funds which represent millions of savers, and whose time perspective is very long. Yet when I talk to Chief Executives, they tell me that when they meet the fund managers who control company shares too often they have too much focus on the short term and on trading shares. There is a mismatch between measures of a firm’s long-term value – and the short-term quarterly earnings targets that CEOs and boards focus on relentlessly.

We welcome the Financial Reporting Council’s new stewardship code (Financial Reporting Council, 2011), and the promise that it will be implemented. I would ask today that the FRC engage independent monitors to evaluate whether companies are now seeing a difference in the way the City behaves. If we want good companies we need to encourage the institutions which promote them.

 

Engaging employees

Public policy should actively encourage companies to value and develop their employees.

As the MacLeod / Clarke report on employee engagement concluded, a wider take up of engagement approaches would impact positively on UK competitiveness and performance. In Peter Mandelson’s foreword he said: ‘what we all know intuitively … [is that] only organisations that truly engage and inspire their employees produce world class levels of innovation, productivity and performance’ (MacLeod and Clarke, 2009). The Hay Group reports that engaged employees generate 43 per cent more revenue than disengaged ones (Hay Group, 2001).

Effective engagement also means a partnership with unions. MacLeod points to the conclusions of the TUC and CBI: ‘Optimal results are achieved where there is a mix of direct employee involvement and indirect participation through a trade union or works council’ (2). It may be significant that three recent direct investments into the UK – into JLR, BMW and Nissan – are all unionised companies in which unions and management share a goal of future success, growing jobs, profits and future investment.

Effective staff engagement and wider union representation in the workplace also underpins our call for a fresh look at regulation. Too often regulation is compensating for the lack of effective institutions in the workplace to embed what can and should be standard practice.

 

Conclusion

In this article I have tried to set out a direction of travel for Labour’s policy review.

I should end by highlighting that it is a very different direction to the current Tory-led government. Their growth review, so light in ambition, so bereft of action, it is already being re-written, has failed to deliver the certainty and confidence in the long term that will release private investment. There are no signs that banking reform will deliver the long-term finance which smaller businesses need. Regulation is seen as always a burden, rather than if used well as a tool to shape fair markets, fair competition and to reward good companies. The emphasis of every government employment policy is to reduce pay and workplace security. Consumer protection and the guardianship of fair competition is being weakened.

I said above that British business is at a crossroads. I think in the years to come it will be clear that British government business policy offers a clear choice too.

 

References

Barton, D. (2011) ‘Capitalism for the long term’, Harvard Business Review, March.

Cable, V. (2011) ‘Private recovery can create growth potion’, Financial Times 17.02.2011.

Financial Reporting Council (2011) The UK Stewardship Code, London, FRC, July.

Haldane, A. and Davies, R. (2011) ‘The short long’, Bank of England.

Harvey, F. (2011) ‘UK slips down global green investment rankings’, Guardian 29.3.2011.

Hay Group (2001) ‘Engage employees and boost performance’, working paper, at http://www.haygroup.com/downloads/us/Engaged_Performance_120401.pdf

Hutton, W. (2011) Hutton Review of Fair Pay in the Public Sector: Final Report, London, HM Treasury.

Kay, J. (2010) Obliquity, London, Profile.

King, M. (2011) speech at the Civic Centre, Newcastle, 25.01.2011.

Lambert, R. (2011) ‘Sir Ralph’s lessons on short-termism’, Financial Times 22.05.2011.

MacLeod, D. and Clarke, N. (2009) Engaging for Success: Enhancing Performance Through Employee Management, London, Department for Business and Skills.

Miliband, E. (2011a) ‘We have started to win back trust’, speech to Progress Conference, 21.05.2011.

Miliband, E. (2011b) ‘Speech on responsibility’, Coin Street Neighbourhood Centre, 13.06.2011.

Milmo, D. (2011) ‘Vince Cable voices concern over Bombardier in letter to PM’, Guardian 1.7.2011.

Plunkett, J. (2011) Growth Without Gain? The Faltering Living Standards of People on Low-to-Middle Incomes, London, Resolution Foundation, May.

Porter, M. and Kramer, M. (2011) ‘The big idea: creating shared value’, Harvard Business Review, January.

Renewable Energy Association (2011) ‘The Coalition Government makes horrendous strategic mistake over Solar’, press release, 18.3.2011, at http://www.r-e-a.net/info/rea-news/the-coalition-government-makes-horrendous-strategic-mistake-over-solar.

Taylor, M. (2011) ‘Enlightened enterprise’, keynote speech, London, Royal Society of Arts, 10.06.2011.

UK Green Building Council (2011) ‘Government’s u-turn on zero carbon is anti-green and anti-growth’, press release, 23.03.2011.

 

Notes

1. ‘By helping us to align our desires, needs and social values, companies can themselves align commercial opportunity with social purpose. By doing so, they can create both deeper customer relationships and new business models’ (Taylor, 2001).

2. ‘Best practice examples demonstrate the potential role of collective arrangements in engagement. The TUC and CBI suggested in 2001: “Optimal results are achieved where there is a mix of direct employee involvement and indirect participation through a trade union or works council”' (MacLeod and Clarke, 2009, 103).

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