We’re getting to that time of year when the media pickings start to thin out for the summer, and even the liveliest editor feels the siren call of that old fallback, the “list” article. Best holiday books? Mountain getaways? Beachwear? Manifesto policies?
OK, so I made that last one up. But if political policies could be so ranked, on a Miss or Mister Universe scale from highly unappetising to downright sexy, you can be pretty sure that the least alluring would be policies to improve corporate governance.
But it’s not like the issue doesn’t matter. Take the financial sector in the UK. The board of RBS was led by the highly regarded Tom McKillop of AstraZeneca, but proved incapable of restraining Fred Goodwin, the prime mover in the bank’s failure. The board of HBOS allowed the management to dismiss Paul Moore, then head of Group Regulatory Risk, and ignore his concerns about excessive risk-taking before its imminent collapse pushed it into the arms of Lloyds, to the ruination of Lloyds shareholders.
Inevitably, much of the modern debate on corporate governance focuses on executive pay, and it’s not hard to see why. Barclays (owner of BZW, where I worked from 1991-7) is a case in point.
It was founded by Quaker families, and used to be a stodgy commercial lender with a flair for innovation, as it showed with Barclaycard. During the crash it moved heaven and earth to avoid any specific state bail-out, over and above the estimated multi-billion pound “too big to fail” implicit subsidy which the banking sector as a whole received and still receives.
Why the extraordinary efforts? Well, here’s a conjecture. Top pay at Barclays in 1979 was 14.5 times that of the average worker; in 2011 it was 75 times, according to the High Pay Centre. Over that period, the chief executive’s pay rose by 49 times – from £87,323 to a staggering £4,365,636. Hard to justify those numbers if you’re on a state handout, as the public spat over the £1 million bonus of Stephen Hester, former boss of the state-owned RBS, illustrates.
Nor are these issues confined to the banks. At BP, for many years Britain’s flagship company, the chief executive earned 63 times the amount of the average employee in 2011. In 1979 it was 16.5 times.
These rises are not the result of increased or internationalised competition for talent: only one successful FTSE CEO has been poached in the last five years, and that was by a British company. Nor are they related to performance: no reputable study has found a significant correlation between senior executive pay and long-term corporate performance.
Pay without performance retains its potency as a political issue at a time of austerity. But there’s a deeper reason why corporate governance matters: even a small improvement in the productive core of the economy would make a dramatic difference to our future prosperity. Apparently modest changes in levels of investment, and in the returns generated thereby, wag an enormous tail of economic value for shareholders and employees alike. At a time of stubbornly weak productivity, this issue is unignorably important.
So what should be done? I made a start myself in thinking about these issues with a pamphlet on Crony Capitalism in 2011. and last week I spoke on these topics at a seminar to launch Beyond Shareholder Value, a new book of essays published by the Trades Union Congress.
The TUC’s sponsorship may raise eyebrows. But the pamphlet itself, although generally of the left, includes academic contributions alongside some very worthwhile essays by independent commentators, and is an interesting attempt to move beyond some of the sterile arguments of the 1970s and 1980s.
Two essays in particular should give pause for thought. The first, by John Kay, is an elegant rebuttal of the idea that the corporation is, or should be understood as, a purely economic entity. As Kay points out, this ignores the degree to which corporations are organic, evolving entities subject to social norms, values and trust. We think of them as profit-maximising, but actually even their directors’ core legal duties in British law go beyond this. Ironically the left fell into a neoliberal view of companies during the Blair years. Its task is now to revert to a more nuanced grasp of the notion of stakeholding itself.
The second essay, by the city economist and writer Andrew Smithers, is a full-frontal attack on the bonus culture of the past fifteen years. Smithers trenchantly argues that, far from aligning the interests of shareholders and management, that culture has done the opposite, giving managers powerful new incentives towards instant pay gratification.
The result is a system oriented to short-term profits, greater volatility of profitability, and weak industrial investment. Most usefully, Smithers extends this diagnosis to an explanation of persistent spare capacity in the economy (the “output gap” beloved of the Bank of England), persistent deficits and poor productivity. It is a brief but trenchant tour de force.
As matters stand, however, two things are clear. The issue is a vital one, and there are lots of policy ideas around–from state intervention, structural reform and increased regulation to voluntary compliance–but there is no genuinely powerful integrating body of thought to tie them together.
For my part, I have argued for a small-c conservative approach, uniting a renewed emphasis on competition with Burkean notions of stewardship and an attack on crony capitalism, but from the political right. The salvation of capitalism, and its reputation, rests on recovering and extending a rich notion of ownership. But that’s another story.
Corporate governance is something for a Conservative government after the 2015 general election. But don’t expect to see it in the manifesto.
