“Backing the Good Company” (July 2011)

John Denham MP, in his previous role as Labour’s Shadow Business Secretary, in a keynote speech on the role of the companies in the UK economy, argued the lasting success of the UK economy will depend on the spread of the “good company” – profitable businesses and corporations which add value both to the economy and to society by being good at what they do, not exclusively focused on the bottom line.

Setting out Labour’s vision for Business and Enterprise in the UK, John Denham told the Social Market Foundation that British business ‘stands at a crossroads.’

Here is a copy of what he said:

BACKING THE GOOD COMPANY, Shadow Business Secretary John Denham

Social Market Foundation, 26 July 2011

I’m grateful to the SMF for hosting this seminar.

Labour’s Business and Enterprise Review was launched in March. Months of intensive consultations with businesses, large and small, across the country, have helped shaped our understanding of the challenges facing British business in the coming years.

In two recent speeches I’ve outlined early conclusions, and the issues we’ll look at in detail in the year ahead. To set the scene for today I shall briefly run over those main themes.

There is no doubt our review covers many of the critical economic, social and political underlying Ed Miliband’s three big challenges:

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.

To meet these challenges, we will need an economy that looks and feels very different to todays.

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; 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.

In the first speech I said that, like the current government, we recognise that the growth and jobs we need will be private sector growth. But this government is carrying out a badly managed retreat from interventionist government policy. Labour will be committed to the development of the intelligent activist government which is needed to create the right conditions for private companies to grow and succeed.

A strong economy is based on strong private companies succeeding in fair competition and in fair markets. But Government policies determine to a significant extent the size and shape of the key domestic markets, the sectors which attract investment, the balance between short-term profit and long term growth; the opportunities to ensure that research is exploited within the UK economy to development successful companies with new products which can achieve world markets.

The Government has a suite of tools – procurement to support innovation; ; regulation to shape markets; competition policy to favour the new and insurgent; IP regimes to protect creativity; financial reform to deliver competitive longer term finance; alongside more traditional supply side support for skills, research, applied technologies, and infrastructure.

All these tools can and should be used to support a clear vision of a rebalanced economy, to ensure growth in all the key sectors in which we can aim to compete in the global economy, as well as creating the right conditions for growth across our economy.

Future success won’t come from Government doing as little as possible – it will be Governments doing all they can to create the conditions for private sector growth, and using all the tools at their disposal in a coherent and consistent way.

In the second speech, I argued that the current machinery of government isn’t capable of delivery such an activist approach.

Low cost investment depends on certainty. 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.

For the businesses we have talked to, the words confidence, certainty and government rarely appear in the same sentence.

In renewable energy the current government has conducted a masterclass in deterring investment through sudden, unpredictable and inconsistent policy changes.  

The machinery of government needs to be radically overhauled to deliver the consistent, stable, predictable policy environment that enables business to make long term investment decisions. 

Today, I will look at the third major issue emerging from our early policy review, the role of companies themselves in the UK economy and how they determine the quality of growth and jobs we need.

At a time when last year’s recovery has been choked off with today’s yet more disappointing GDP Q2 ‘growth’ figures of just 0.2% – 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 OBR projections has estimated that median gross real wages adjusted by RPI are set to be lower in 2015 than they were in 2001. The Governor of the Bank of England has talked of living standards falling for six years.

And this is not just because of the global banking crisis and our stuttering recovery; though it is being made worse with living standards squeeze of the 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 Resolution 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.

The economy was creating 3 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 recognize 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?

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.

It 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 than 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 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’.

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 will 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 of 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.  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”

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 “GE, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and Wal-Mart.”

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 £13.7bn 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 makes 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 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 in 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 help tilt the balance; shape the choice; one way or another.

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 today 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 our more detailed work after the summer.

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 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.

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.

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.

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

Little of the £150bn of public procurement each year is used in any conscious way to raise the 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 DARPA and 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.

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. 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.”

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 incentivized. 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.

If we want to 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 behavior. 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.

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 5 years in the 1960s to less than 8 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.”

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 new FRC stewardship code, 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. 

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… only organisations that truly engage and inspire their employees produce world class levels of innovation, productivity and performance.”

The Hay Group reports that engaged employees generate 43% more revenue than disengaged ones.

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.

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 the jobs and 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.

Today 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 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 earlier 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.