Labour’s next bold reform should be civic capitalism
It was a real pleasure this week to help launch the High Pay Centre’s thoughtful new report - A Charter for Fair Pay - which is incredibly well timed. Because next year, two key reforms - the Pensions Bill and the Corporate Governance Bill - give our country the chance to move our model of capitalism towards what you could call Civic Capitalism.
Amongst the biggest achievements of Labour’s early days in power is the beginnings of a new bargain with business in which we raise the national investment rate in return for better pay and conditions for workers who have endured a punishing decade of flat living standards.
Of course the Budget was tough - but new taxes were needed to pay to fix our shattered foundations. And crucially these new taxes will help surge around £12 billion into the sort of investment business needs to thrive.
Along with reform plans set out by Liz Kendal and Wes Streeting to drive up the employment rate to 80%, we’re now seeing concrete ideas to grow the workforce and equip the workforce. That’s good for growth, it’s good for the business bottom line - and it should be good for pay.
But, alongside these bold ambitions for investment infrastructure and industrial policy to help business thrive, has come a big new reset of industrial relations to make sure that success is fairly shared.
So it it is time for one step further: it is time to build a new ‘civic capitalism’ in our country, something which is essential if we’re to become both the fastest-growing economy in the G7 and a land where living standards rise once more.
Almost every economist will tell you that the root of Britain’s economic malaise has been low investment and hence, low productivity growth. Short-termism in our board rooms is at the root of both. And that is why we need to fix two relationships at the core of the marketplace. The relationship between investors and the company, and the relationship between a company’s board and the business it helms.
So, what needs to change?
First, we need bigger investment funds that are more engaged in the businesses they steward.
Since the advent of modern portfolio theory, investors spread their eggs between so many baskets, they cease to engage in the firms in which their capital is put to work.
That is an error.
We need to radically consolidate long-term investment funds, like pension funds and life insurers, so they have the scale to actually take a closer interest in the firms in which they invest, paying more attention to issues like long-term investment and better standards for climate and workers’ rights. This is not a clarion call for some sort of ‘woke capitalism’. Firms that respect these things perform better in the long term.
Today, less than 20 per cent of firms have a controlling shareholder — one of the lowest ratios in the world. This means that these investors now hold just six per cent of shares. When ownership is so dispersed, there is little incentive to intervene when businesses go astray and to steward them in the long-term.
Second, we need new frameworks for corporate governance. Voluntary frameworks like the Good Business Charter and B Corp Certification provide a clear pathway for businesses to measure, improve and report on their impact which in turn, attracts investors and new customers. Higher sustainability standards directly correlate to better performance, encouraging a race to the top.
We have a long tradition in this country of the success of such ethical entrepreneurs. Think of George Cadbury, or William Lever, or John Spedan Lewis, featured in my book Dragons: Ten Entrepreneurs Who Built Britain. Today, we’re blessed with more contemporary examples.
The momentum behind the B Corp movement is a case in point. The UK has one of the fastest-growing communities of B Corps in the world with over 2,000 certified so far. These businesses are raising the ceiling on good practice and have changed their Articles of Association to place the interests of people and the planet on a more equal footing with shareholder interests.
But this approach is currently the exception, not the rule. We still have too many businesses focused solely on maximising their own short-term gain. To create real change, boards must take a more holistic view of success which requires advancing a new model for marketplace success. Proposed legislation like the Better Business Act could be fundamental in achieving this by updating Section 172 of the Companies Act 2006 to ensure all businesses align the interests of people and the planet with profit.
Today, we have too many examples of firms that fail to do business in ways that offer sustainable healthy returns over the long term. The collapse of Carillion, the Post Office scandal or the environmental damage caused by water companies are all examples of how bad decisions made by boards create costs that have to be mopped up by the rest of us – society, government, pension savers and taxpayers.
Labour has a unique opportunity to reset good business practice to ensure both profit and purpose. As we look to the Budget, it’s time for Labour to make bold and transformative changes to the economy. An essential starting point is reform of company law to enable good businesses to become the norm, not the exception.