Businesses: Rights and Responsibilities

Lord Hodgson of Astley Abbotts Excerpts

Thursday 8th December 2016 Lords Chamber

Moved by

[Lord Hodgson of Astley Abbotts]

That this House takes note of the case for maintaining the balance between rights and responsibilities in the corporate sector.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I begin by reminding the House that most of my commercial career has been spent in the City of London. I therefore have had the chance to see the ebb and flow of corporate behaviour at first hand. My remaining and existing commercial links are, of course, declared in the register of your Lordship’s House.

The origins of this Motion were from a QSD that I tabled on 18 May last. I invite the House to note that date. I was concerned then that there was increasing public concern about the role of the corporate sector in our national life. Since then, there have been at least two epochal events—the decision of the people of this country to leave the European Union and the decision of the people of the United States to elect Donald Trump as their next President.

Some commentators referred to the debate on the EU referendum as a contest between Project Fear, from those who wanted to remain, and Project Rage, from those who wanted to leave. Certainly, Trump’s successful campaign had an element of rage within it. In my view, those who raged did so because they felt that the economic system had not worked successfully to their advantage, that their living standards had been static and that they had increasingly lost control of their lives. They are right in at least two senses. First, as most commentators would agree, the share of reward or profit going to capital has increased at the expense of the share going to labour, and within the share going to labour the division of that reduced amount has not been sufficiently fairly shared between the administrative managerial classes and the rest. Specifically, in this country, there has been rage about the emergence of what is fast becoming two nations, London and the south-east and the rest. It has led to a grumbling dissatisfaction with the established order, which has its most brutal expression in phrases such as, “We need to drain the swamp”.

Some of my business friends seem to take comfort from the fact that this appears to be aimed at the political class alone. I have said to them—and I say now—that if you follow the thread of that argument through, it is not long before business and commerce start being seen as part of the swamp, too. Nevertheless, I believe that the system that we enjoy in this country, which links liberal democracy, established personal rights and freedoms, with universal suffrage and capitalism, the right to buy and own property and to sell one’s labour freely, is the system most likely to provide the best outcomes for the greater proportion of our fellow citizens. Of course, it is not perfect, and I accept that there are those who argue for a different system—for example, with a return to a greater degree of public ownership, but that is an argument for another day. But our existing system will endure only if our fellow citizens feel empowered by it, which will not be achieved by political actions alone. It will require British commerce and industry to reflect very carefully on their powers and influence and how they are to be deployed in future, particularly given the upcoming fourth industrial revolution, which will transform our society with the introduction for the first time of artificial intelligence and robotics. It is to examine that balance and the challenge that it represents that I have tabled this debate today in your Lordships’ House, where there is a wealth of experience on all sides of the argument.

There are those absolutists who, despite the provisions of Section 172 of the Companies Act, say that the business of business is business and that a company’s only duty is to comply with the law and thereafter its only duty is to maximise profit for its owners and shareholders. At its most extreme, such people take the view that, if the Government or Inland Revenue cannot draft the regulations sufficiently tightly to avoid well-publicised schemes, the company is entitled to pay no tax at all. Whatever may have happened in the past, today, with much greater transparency and with information available around the world at the click of a mouse, that view does not hold water. Indeed, its widespread practice would undermine public confidence in the established order—and where will owners and shareholders be then?

On the balance, it is a truism that successful businesses are an essential part of our society, creating employment and providing substantial revenues to the Exchequer. To be able to operate successfully, they need certain conditions to be fulfilled. Those are their rights. They need an appropriate system of company law, enforced by an independent judiciary; an administration that operates, at local or national level, free from the taint of unfair influence; a Government to whom they can turn for support in their dealings with other Governments or their representatives; and a system of regulation that is not unduly burdensome and is reviewed from time to time to ensure its continuing effectiveness and relevance. Last but not least, they need a degree of constancy of approach, as many business decisions are by their very nature long term, and too frequent jerks of the tiller of the ship of state are not helpful.

In very great measure, this Government have provided that framework in a very sensible way. Inevitably, there will always be arguments about the level of regulation, but the fact that the Red Tape Challenge is now an established part of the Whitehall machinery provides at least an avenue for redress. Perhaps only in one sense have the Government fallen short—in constancy of approach. Many businessmen talk to me about the frequency of the turnover of Ministers in departments. Every Secretary of State is going to want to impose his or her mark on the department, which inevitably means shifts in direction and changes in priorities, which are not helpful to the creation of a good business climate.

So much for the rights of the corporate sector—what about its responsibilities? I am aware that the criticisms that I am about to make are likely to be met with the retort that only a minority is behaving irresponsibly. That may or may not be true, but the bad guys make the weather in public opinion. Given that the reputation of the corporate sector is at present fragile, the sector has to accept responsibility for the behaviour of its weakest links. First, there is the democratic deficit as regards shareholders, with the effective disfranchisement of private shareholders, who increasingly hold their shares through PEPs and ISAs, SIPPs and other collective investment vehicles. Such shareholdings cannot be in the name of the individual; they have to be in a nominee name. Furthermore, as settlement periods for Stock Exchange share dealing are shortened, stockbrokers increasingly require their clients to hold their shares in a nomineeship. The consequence is that notices, results of meetings or general announcements never reach the underlying shareholders, who become cut off from the company in which they have invested. You might have expected that companies would wish to maintain links with people who are, after all, their owners—but I am afraid not a bit of it. They appear to take very little or no interest at all. Instead, company managements tend to focus on the handful, often no more than 10 or so, of the institutional shareholders who together effectively control their destiny.

That takes me to my second point. The standard of stewardship by most financial institutions is remarkably low. Dealing with institutional shareholders, as I have done in my past life, can all too often be a deeply depressing experience. They have a limited understanding and interest and, in the case of tracker funds, no interest at all; an unwillingness to help to address important issues and challenges; and an unreadiness to get involved, except to complain when the company is not progressing as fast as the shareholder would wish.

The third aspect where the corporate sector has been found wanting is in addressing public concerns about the level of executive pay. This topic alone could take up a whole debate. I have been the chairman of a remuneration committee of a public company, and I know that setting executive pay is an exceptionally difficult and challenging thing to do—so I am not trying to underestimate the problems that it presents. But there is a widespread view that the sector is in denial about the problem. At the very least, it has put the problem into the drawer marked too difficult. The FT on 24 November had as a front-page headline, “Theresa May suffers backlash over flagship business reforms”. Having read the report, which I have here, I do not think that it is a very fair headline, but never mind that—it is the headline. The impression is that the corporate sector is being dragged kicking and screaming to make changes that address public concerns. How much better would it be if the sector was to get ahead of the curve and bring forward its own proposals?

I leave those areas where the corporate sector is directly responsible and turn to other areas where a clearer and better contribution to society could be made, such as employment practices. I assure the House that this is not going to be a rant about immigration. I recognise that selective immigration is an important part of maintaining a dynamic economy. Too often, however, the British corporate sector sees immigration as the default option. It can be easier and cheaper to recruit trained individuals from outside the UK instead of training up our own settled population.

I have two examples. I have a house on the border of Shropshire and Herefordshire, where a great deal of soft fruit is grown. It can be easier for a fruit grower to ask a gangmaster to provide 100 temporary workers to undertake fruit picking for a couple of months in the summer than to hire 100 British workers individually. The gangmaster takes responsibility for all the interviewing and associated paperwork before delivering and removing the workers on the agreed dates. But one consequence is that the local unemployed do not get a look-in.

My second example is not anecdotal. In a report permitting increased immigration of healthcare workers, Professor Sir David Metcalf, the chair of the Migration Advisory Committee, a government body, said:

“We have reluctantly made this recommendation. However, there is no good reason why the supply of nurses cannot be sourced domestically. There seems to be an automatic presumption that non-EEA skilled migration provides the health and care sector with a ‘Get out of Jail Free’ card”.

An authoritative cross-party committee of your Lordships’ House looking at the economic impact of immigration said:

“In the long run, the main economic effect of immigration is to enlarge the economy, with relatively small costs and benefits for the incomes of the resident population”.

These examples and this conclusion are unlikely to convince the wider British society that the corporate sector has its interests truly at heart.

As part of a serious effort to restore public trust and confidence, the sector might consider a much wider and better publicised effort to support initiatives in our civil society. These could take the form of direct action. For example, a running sore in our society is the ineffectiveness of our prison system, with two-thirds of our prison population reoffending within 12 months of release. Every study suggests that what a prisoner wants on release and what is most likely to stop him or her reoffending is a house and a job. How many UK businesses are making a really serious effort to employ ex-offenders? How many are ready to accept the inevitable setbacks and disappointments, secure in the knowledge that there will be individual successes and, more generally, that society will slowly recognise the contribution that business can make to our social cohesion?

If direct action does not fit the bill, businesses can do more to support charitable and voluntary endeavours in the communities in which they operate. This is not just about money, it is about providing skills and expertise to these groups—and it is by no means a one-way street. Those businesses that have adopted this approach find that their employees’ subsequent performance is enhanced by having had to work with volunteers—notoriously difficult to lead—while tackling extremely difficult socioeconomic problems.

Let me conclude: it is perhaps not too dramatic to say that we have a bit of a struggle going on for the soul of our liberal democratic system. The Prime Minister and the Government have led the way by raising some important issues and asking serious questions in the Green Paper released last week. But the struggle cannot be carried by politicians alone. All those who believe that our current broad approach is the best one will have to fight for it, explain its values and make the necessary changes so as to demonstrate its relevance and its worth to those who have felt increasingly disconnected and disempowered. In this struggle, the corporate sector has a critical role to play—standing fastidiously on one side saying that it is all down to the politicians is not an option if our system is to survive. I beg to move.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts]

My Lords, when I opened the debate, I said that your Lordships’ House had a wealth of experience and some very interesting contributions would be made. I have certainly not been disappointed by that, so I thank all noble Lords who have participated—and, in particular, I thank my noble friend on the Front Bench for his sympathetic and extensive reply.

The convention allows me about one minute, so I shall pick out a couple of points. My noble friend Lady Bottomley emphasised the importance of “comply or explain” as a means of maintaining flexibility in our corporate governance structure. That is very important —and, in passing, I congratulate her once again on a very distinguished maiden speech in that Second Reading debate. The noble Baroness, Lady Bowles of Berkhamsted, reminded us that the availability of limited liability as a means by which to safeguard yourself personally imposes additional responsibilities and duties on you. My noble friend Lord Eccles, in a characteristically thought-provoking speech, reminded the House that this is about people and that what we are discussing is not theoretical—it impacts on real people’s lives.

Last, but not least, the noble Lord, Lord Monks, said that he thinks that employee participation would make decisions more long term. I have to say to him that in the cases where I have helped employee buy-outs, where a substantial portion of the shares go to employees, they are pretty quick to want to sell and cash in when time comes. But that is an issue he and I could discuss at greater length over a cup of tea—or something stronger.

I am sorry not to be able to mention the other speeches, all of which I thought were very valuable. I thank all those who spoke and I am sure that all noble Lords agree that this issue will run and run.

Motion agreed.