Time to reset British capitalism
A future Labour government wants growth, growth, growth. So it should. Growth offers more quality jobs, higher living standards, increased tax yields, improved public services and above all confers optimism – a sense that tomorrow can be better than today. It goes without saying growth should be sustainable, but that only reinforces the urgency. The conundrum is how.
Prime Minister Truss’s answer is that growth is driven by the rich or wannabe rich incentivised by yet more tax cuts to be so-called“ wealth creators” – trickle-down economics: the evidence that it works is slight to non-existent. Nor is that surprising. Growth comes from the application of inventiveness, but through thousands of firms and millions of people using the gifts the gods gave them to make the world better, generally incrementally but occasionally in step changes, which translates into more effective and efficient delivery of whatever good or service. Growth is not the incidental by-product of rich “ wealth creators” ; it is the product of complex economic and social organisations that marshal and integrate these impulses so they are effective
It is multiple forces that come together to support the inventiveness that drives growth – a trusted, stable and peaceful framework in which to work and build a business, knowledge and skills, access to rich markets ( in our case the EU) and an assurance that demand will grow, means to mitigate risk, investment in science and technology, great and cheap transport links, availability of appropriate finance , the rule of law and the security of property rights and contracts that flow from it. But there is one over-riding and overlooked precondition for growth. How companies are owned, governed and managed.
This linkage between how companies are owned, how they are then governed and the strategies they adopt is fundamental to any economy’s capacity to grow. But the UK is an outlier. Unlike any other advanced industrialised country it insists that the over-riding priority of a company is the fiduciary obligation to pursue profits rather than the firm’s wider health and purpose, moreover it has built the entire financial and ownership ecosystem around that proposition. It is thus harder in Britain to create a group of anchor shareholders who get behind a company’s mission and who will stand behind it through thick and thin than in any other; instead most companies suffer wildly diffuse and numerous shareholders who have no means – apart from buying or selling – to express their support or otherwise. It is a wild west of fractionalised, dispersed, uncommitted owners in which the opportunity to demonstrate sustained inventiveness over time in a healthy organisation by binding all the stakeholders into a common cause is made impossibly hard by the prior obligation is profit maximisation. Takeover and loss of independence are absurdly easy. There is never one reason for low investment, low innovation , low spending on R and D and poor productivity growth – but unless Britain changes its approach to ownership in a major reset of its capitalism, it does not have a chance of meeting even the necessary precondition for sustained growth.
Nor does the vital reset stop there. The mono-culture in which profit comes first may come from the dominance of publicly owned companies and large companies in private ownership – private equity – in the ecosystem but it spills over into the economy at large. There are too few co-operatives and mutuals. Too few employee owned companies. Too little public ownership. Too few foundations. Too few partnerships. In short overall there is too little capacity for workers, managers and directors to act purposefully on the economic world to change it for the better, drive innovation and productivity – and in the process make profit. Profit should be a means to an end – ensuring the survivability and sustainability of an enterprise – but it cannot be the end. The end is a business’s purpose which should be its north star. A business exists to make the world better in some way – that is, after all, the origins of any market niche in which customers repeatedly offer their patronage.
Great companies around the world know this without it being spelled out; It is part of their DNA. It could be Sweden’s IKEA, the US’s Apple, Japan’s Sony, Germany’s Bosch or Schneider. Even in Britain a commitment to deep or intrinsic purpose is what lies behind the strength of companies as disparate as Legal and General or the John Lewis Partnership. The trouble is they are exceptions – not the rule. The ecosystem and legal framework to make such companies more commonplace does not emerge spontaneously from market interactions in the market place – the complacent conservative doctrine. The architecture has to be put in place by the state. If Labour want growth and business willingly to partner with it in achieving bold national missions, motivating all its stakeholders, then its first acts in government must be lay the foundations of this new architecture to create more companies readier to step up to the plate.
Thankfully some of the groundwork has already been done, and on top there are a number of companies and investors who are moving in this direction of their own accord. Purpose works, attest CEOs and leading investors, in on the record interviews published by the Purposeful Company in the Purpose Tapes: ( see www.thepurposefulcompany.org) it motivates, it engages workforces, it provides a compass with which to navigate difficult trade-offs, it drives investment and innovation, it persuades stakeholders to join in the common endeavour. Reform is always easier and with greater chances of success if it works with the grain of what is happening rather than against it. The last Labour government bequeathed the 2006 Companies Act and its Section 172 – much watered down from its original intent – but nonetheless on the statute book. It provides for directors to take account of the interests of stakeholders other than shareholders if they believe that in so doing they promote the shareholder value in the company. Pure pursuit of shareholder value is leavened by recognition that other factors contribute to a company’s vitality.
The 2020 Corporate Governance Code goes one step further; it invites its signatory companies to declare and report on their purpose. Only a fraction, says the Financial Reporting Council ,actually do it properly – but again a bridgehead exists. There now needs to be a Companies Act which builds on these advances and requires companies to incorporate around a declared purpose on which they report not only to shareholders – but to all their stakeholders. Auditors should audit how satisfactorily purpose has been implemented.
Britain’s utilities should not be expensively renationalised. Instead the same Companies Act should provide for their incorporation as public benefit companies: that is to say their overt mission should be to deliver the public benefit which they should write into their articles of association of each particular business – water, electricity and gas generation, networks to deliver gas, electricity, data etc – around guideline universal service obligations. The regulator should independently verify that they are discharging their public benefit commitments, working with independent directors appointed as one of the privileges associated with owning a newly created £1 foundation share which the government takes in every regulated utility. Regulation should be overhauled to permit more proactive regulation, with it understood that licences will revoked from underperforming utilities ( Swiss regulation is an important model). Already the best in the water industry for example – Severn Trent, United Utilities, Northumbria – act voluntarily as public benefit companies. This will extend the principle to all.
Appropriate shareholders prepared to invest in this new asset class of public benefit companies will come forward – already there are superannuation funds in Australia, the US and Canada large and long term enough in their thinking, already investing in British utilities, who will increase their holdings. They need to be joined by British insurance companies and pensions funds. A newly created British sovereign wealth fund, funded from a mix of public asset sales, windfall profits taxes ,further levies on North Sea Oil and Gas production and sales of bonds to ESG investors, would take stakes as an anchor shareholder to boost British ownership on the model of the Norwegian Sovereign Wealth Fund, Norges. The Fund would be arms length from the state, autonomous and its decision making wholly commercial – but within a framework of long term commitment to purpose.
Alongside this every part of the country should have access to a network of decentralised financial institutions – some public and some public-private partnerships – whose sole aim is the scale up of fast growing small and medium sized enterprises. They need the same mix of patient anchor shareholders and long term bank finance as larger companies, along with voting rights that protect them from unwanted take over as they grow. We need the next generation of great companies to regenerate a British economy over-populated with ageing firms at the end of their natural life cycle.
Of course there is more to support growth – raising R and D spending, creating high growth clusters around our universities, a skills revolution, turbo-boosting the effective but too small Catapults with their mission to foster start-ups and scale-ups, regaining full access to the EU customs union and single market and re-joining the Horizon programme, driving to net zero and levelling up, using public procurement more cleverly as was done with sponsoring vaccine research and production. But none of it will catch fire into sustained high growth without purposed firms uniting all their stakeholders into a common mission to capitalise on the opportunities. It is a great prize. The best in British business is already operating in this way. We need the rest to join them in what will be a genuine ownership and innovation revolution.
Will Hutton is President of the Academy of Social Sciences, co-chair of the Purposeful Company, Observer columnist and author.