"I am today launching a call for evidence on the subject of pay, corporate governance and takeovers. It is called “A Long-term Focus for Corporate Britain”. It should produce a rounded account of the issues that may be causing a dislocation between what is best for the ultimate owners, the incentives of their agents, and what is best for managers."
Business secretary Vince Cable today addressed the CBI conference in London.
He announced a review, entitled “A Long-term Focus for Corporate Britain”, to consider whether there are failures in corporate governance and the markets, and called on company directors, shareholders and other investors to contribute their views.
Check against delivery
"I hope you will find this different from the sort of speech you have heard from Business Secretaries over the years. Partly because a year ago none of us expected that a Liberal Democrat Business Secretary could be standing here today – although I should acknowledge that that the CBI has been remarkably far sighted; Digby Jones first invited me to speak to you eight years ago, the first LibDem asked to do so. I recall some members wondering “Vince Who?”
It will also be different because it would be wrong for me to deliver a “business as usual” speech. We have been through a massive economic shock and now face a major challenge in achieving growth – which lasts.
Just a few years ago, most people in politics, not only Gordon Brown, thought the growth problem had been solved. The only dispute was between those who shared Gordon Brown’s view that the British economy was healthier than at any time since the Hanoverians and those who thought we had to go back to the Romans. I don’t mean to be mischievous when I point out that even my Conservative Coalition colleagues were busy developing policies about “sharing the proceeds of growth”; the assumption – widely shared – being that strong growth was bound to continue. Those of us who were worrying publicly about the unsustainable build-up of household debt, the housing bubble and the lending practices of banks were regarded as eccentrics or party poopers.
Now, instead of sharing the proceeds, we need to think hard about how to grow out of a crisis.
The metaphor I have often drawn is that the British economy, two years ago, suffered the economic equivalent of a heart attack with the near collapse of the banking system. Death was averted by speedy intervention to shore up the banking system to prevent an economic slump. The patient is now being nursed out of intensive care and off steroids. But serious damage has been done and we are only now at the stage of planning rehabilitation.
The difficult choices we make now will determine not only our recovery but the shape of our economy for years to come. We have good examples to follow. While the crises in Sweden and Finland in the early 1990s were just as bad as what we have gone through, they – like the Asian Tigers in the late 1990s – took a path of vigorous reform and a focus on export-led growth that has left them amongst the most competitive and successful countries. Contrast this with Japan’s experience – a long standing refusal to reform, especially the banking sector, has led to persistent stagnation.
We must not make the same mistake of putting off reform. Growth cannot copy the past – with a superficial economic prosperity based on booming property markets; where the South East was wealthy as Switzerland while other regions stagnated; where both the number of multimillionaires and NEETS grew; where there was low investment in industry, and a plummeting household savings rate. An economy where manufacturing declined year after year, as the government’s dependence on banking grew.
So how do we do better?
The answer is partly about fostering financial stability through Government budget discipline and giving businesses confidence to invest. It is partly about removing government imposed obstacles to growth: onerous business taxes, red tape which suffocates small firms, and a slow oppressive planning regime. But it also about government doing its job properly. Doing the jobs the market does not do by itself: education and training, infrastructure provision and basic science leading to innovation.
But I am sometimes pressed to say if I share my predecessor’s enthusiasm for active industrial intervention. I made it clear when I first took up this job that there was no money left for me to run around British businesses waving a cheque book. I can’t. And I don’t believe in “picking winners” – which is neither sensible or affordable.
But we still have choices to make: about allocating the training budget; or funding certain kinds of scientific research; or promoting science, technology, maths or engineering degrees in higher education. We have to make some strategic choices. We can’t avoid that.
And it is possible to identify sectors where Britain has developed a competitive advantage in fiercely competitive markets, as the Prime Minister alluded to earlier: advanced manufacturing; aerospace; pharmaceuticals; creative industries; professional services. Some firms have benefited from Government support; most not. We can help sectors air their concerns in a coherent way – as has happened through the Automotive Council which has done outstanding work in repatriating the vehicle supply chain.
And we are helping by supporting scientific and technical research. We have also received from the Spending Review a commitment to develop a network of innovation centres based loosely on the German Fraunhofer model. And we can support training as we are doing with boosting the number of apprenticeships.
Beyond that, the government has very limited scope to promote growth through fiscal stimulus. And with private consumers being so debt-laden, growth will have to come from the business sector and overseas trade. Trade and openness are crucial to recovery.
Despite being the sixth biggest economy in the world, we will remain a small part of a growing world economy. Openness to that economy is our greatest opportunity. In particular we need to focus attention on those rapidly growing emerging markets outside the EU. The Prime Minister and I see a central part of our job as working with business to exploit these opportunities.
I have, personally, travelled a long and winding road politically and professionally, through business, Government, international organisations and academia. But there is a powerful, consistent thread from the days 40 years ago when I sought to inspire a generation of Scottish students with the ideas of Adam Smith on free trading and of Ricardo on comparative advantage. In the days when I was in the Labour Government of the 1970s, one of the things I am most proud of was helping to defeat those who wanted to turn Britain inward through import controls and, working with my boss, the late John Smith, to overcome resistance to Japanese and other foreign investment. It remains more true today than ever that Britain must be open for business.
And a further problem that previous governments seldom needed to think about – maintaining a flow of credit to good, credit-worthy companies – will remain central to my agenda. We are after all still cleaning up after the massive damage caused by the near collapse of the banking system.
I can see Richard covering his eyes and groaning, alarmed that I may be about to embark on a round of “banker bashing”. What I can tell him is that businesses – including a lot of CBI members – keep telling me that I am not bashing them enough.
Of course, there is no point in engaging in a sterile public exchange of insults. But no one listening to the Chancellor’s statement last week will be under any doubt of the Government’s collective determination to ensure that banks act in the interests of the wider economy – and that in the New Year they don’t engage in another self-indulgent bonus round.
I do, however, agree with Richard when he says that politicians should not just criticise but describe what kind of banking system they want in this country. How should it look in five years’ time?
A guiding principle should be investing for the long-term. The model of finance that brought us to this point was disastrously short term. Securitization is a valuable innovation, but it reached the point where investments were being made with little concern for long term factors, because everyone assumed they could sell them on in liquid markets. Loans were increasingly divorced from the relationships that can make the loans work. What the Bank of England governor calls the casino part of investment banking came to dominate and in some case destabilise leading banks.
There is an important role for trading activities; for hedging in markets like foreign currency and commodities which are inherently volatile. But as Warren Buffett put it: “We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’”
I appreciate that most banks can’t be like Warren Buffett, who when asked what his favourite holding period was, answered “forever”. In any relationship, it must be possible to seek a divorce. But we have reached a point where thousands of businesses have a choice of just three or four partners, which is clearly unhealthy and open to abuse.
So in five years time we would like a much broader choice for businesses. More banks who understand SME finance. More non-bank sources of finance. More use of equity. More specialist knowledge of sectors.
And to align bankers’ interests with customers it is essential that we look at remuneration policy. After all, the best entrepreneurs – many of you in this room – often have to wait many years before being able to take money out of the firms you have founded.
This is not a call for something alien to business. It is what the late Sir Brian Pitman, the long-time chairman of Lloyds bank, believed in. He believed that his bank should be run for its shareholders. But a critical aspect of that was to have an enduring respect for customers. Let us remember that Sir Brian made his shareholders very well off – and he regarded 10 years as a sensible period for measuring shareholder value.
And for those who say that by crimping the banks’ style, by stopping them indulging in short term speculation, that we are somehow damaging their shareholders’ interests, I want to know: how did short termism work out for you? A glance at the share price graphs around 2008 suggests “not very well”.
Having preached about long-termism, Government must practise the same virtues. The strategy at the core of our fiscal policy is about taking care of the long term, even if it means pain in the near term.
I’ve already touched on the tough, long term decisions we have taken in the CSR to take care of the long term – the defence of science, the new technology centres – steps we take today that might only yield fruit in the longer term.
But it is more than about how we spend. When I talk with business leaders about investing for the long-term, one word that keeps being repeated is uncertainty. After the last two years, I am hardly surprised! In fact, my colleague the Chancellor in his recent Mansion House speech mentioned “uncertainty” over twenty times.
To a degree, but the world is inherently uncertain. After all, I am in a room full of businessmen, none of whom will have entered business for a quiet life. For the best, uncertainty creates opportunity, as innovative companies fight for a competitive advantage.
What business does however need to know to promote growth is that there are clear, consistent rules to govern business behaviour. Which brings me on to competition policy. Competition is one of the great drivers of growth, keeping prices low for consumers, driving innovation, experimentation and investment.
When I used my party conference speech to suggest the need for a more active competition policy, this was interpreted as some kind of modern Marxism. Far from it – this is a defence of capitalism, not an assault.
And the UK’s competition regime is regarded as one of the best in the world – particularly because of its independence and the transparency of decision making. And the EU regime on top of it – the system of state aid rules that help to prevent subsidy wars - is one of the Community’s most successful activities.
But there is scope for improvement. In particular, there are difficulties in successfully prosecuting anti-trust cases and a paucity of market investigation cases. I would also like to question whether our current system of sector-specific regulation is ideal, or could we achieve something better through cross sector regulation.
A system that is too slow imposes unacceptable costs on the regulated, and is an insufficient deterrent for would-be abusers of a dominant position. Competition Act cases have taken on average three and a half years between the investigation to a final decision. This is too slow – hardly the “efficient and timely processes” that the CBI has called for.
I also want to ask if we are making enough investigations. Our rate of three or four a year looks odd compared to 15 in France and even more in Germany.
In the New Year, the Government will consult on proposals to deliver more streamlined and consistent processes - including bringing the Competition Commission and the competition functions of the Office of Fair Trading together to form a single competition authority, which I hope will be more proactive in addressing problems.
This brings me to company leadership. And leadership more broadly. Can you remember the dramatic predictions about the threat posed by hung parliaments? In fact, it was a former director of the CBI who said that they “were not good for taking action to reduce the deficit, and it’s not good for taking decisive action full stop.” My response to this: cobblers! As wrong as you can get. Accountability, consensus – these go well with decisive action.
And as it is with government, so it is with business. I believe that empowered, informed shareholders, investing for the long term, are good news for the companies they own. Alongside directors and managers aware of their wider duties, such shareholders provide the space vital for longer term decision-making.
The Government’s concern – along with many other interested parties – is that current practice is falling short. While I acknowledge there are institutions that engage actively with management in determining the long term strategy of the companies they own, we are concerned that the metrics for assessing company performance and the mind-set of many fund managers remain focused on the short term.
On takeovers, I have concerns that too many are driven by short-term financial incentives. The Takeover Panel has announced some changes. The Panel is an independent body, but I want to acknowledge its willingness to challenge the interests of its client organisations with some proposals.
We will seek to go further: for example, by looking at requiring the pre-notification of mergers to bolster the ability of the competition authorities to preserve competition.
To tie all these issues together, I am today launching a call for evidence on the subject of pay, corporate governance and takeovers. It is called “A Long-term Focus for Corporate Britain”. It should produce a rounded account of the issues that may be causing a dislocation between what is best for the ultimate owners, the incentives of their agents, and what is best for managers.
Yes, it will look at executive remuneration. To quote Richard again: "If leaders of big companies seem to occupy a different galaxy from the rest of the community, they risk being treated as aliens." CEO total remuneration rose by 14% p.a. over the ten years from 1999-2009 – even though there was only a rise in the value of the FTSE 100 of 1% p.a. Compare this to average earnings growth of 4%.
So perhaps it is time to return to Earth. The best way to achieve this is surely to strengthen the relationship between shareholders and the managers they are paying. It is, after all, their money! We want to ask whether shareholders are being told enough about the basis on which managers are paid, and whether they should have a binding vote on practices that may be against their interests.
Let me end on a positive note. Britain has lot going for it and good prospects for recovery. We are an outward looking country. We have world class companies, universities, scientists and creative talents. We have flexible labour markets and favourable demographics, unlike most of Europe. There is a competitive exchange rate favouring exporters and inward investors. There are negative real rates creating strong incentives for new investment and a large pool of savings looking for investment opportunities. And you have a strong, stable coalition government committed to fiscal discipline and radical reform. We will do our bit. I trust business will deliver."