United Kingdom: Productivity

Lord Monks Excerpts

Tuesday 8th September 2015 Lords Chamber

[Lord Monks (Lab)]

My Lords, I share the Minister’s football allegiances. I welcome most of the things in the Government’s document, to which he has been speaking, especially the ideas of a training levy and of the northern powerhouse, for which he has particular responsibility.

These worries about British productivity are not recent. They can be dated back to the 1870s by some people, when it was recognised that we were slipping behind the United States and Germany. It has troubled successive Governments since then. The high oil revenues and financial services bonanzas of recent decades took the pressure off, but it is back with a vengeance after the crash of 2008—there are no bonanzas around. Our productivity rates are such that it takes a British worker five days to do what a French worker does in four, which is a pretty stark comparison with a country of a similar size, importance and development. Our productivity problem is caused in part by the problems addressed in the Government’s document and which have been listed by the Minister. However, I want to apply my remarks to other factors that do not get the same prominence in the document.

Take executive pay: poor productivity is to a large extent a consequence of low investment in equipment and skills, and a major cause of that low investment is the incentives governing executive pay, particularly the practice of rewarding short-term success. Since 1990, despite the recent welcome improvements to which the Minister referred, investment in the UK declined from 26% to 17% of GDP. How much a company chooses to invest is, of course, a decision for its managers. The way they approach that decision inevitably depends on how they are rewarded and what their incentives are. Bonuses encourage executives to emphasise the short term, for which they are rewarded, and as a result give less weight to the long term, often despite exhortations to the contrary. Andrew Smithers said in a recent article in the Financial Times:

“Ten years hence, shareholders might rue your decision to cut investment or raise prices”,

but you probably will not be around: you will have taken the money and gone. To raise investment levels we need to change executive pay systems, linking them more to market share and organic growth. These are common criteria in German executive pay systems and in other EU countries comparable to ourselves, all of which have enviable productivity records.

Executive pay is linked to the wider problems of British corporate governance. Our model of capitalism—a word we will perhaps use more and more in the Labour Party in the near future—provides a privileged place for shareholder and shareholder value. As I said, the resulting focus is on short-term results. Some executives I know dream of a generous takeover bid and the windfall that it would provide for them. That dimension of corporate governance being short-term oriented is very important for looking at the productivity problem. It means that there is less emphasis than should be the case on relations in the workplace between employees and management, between unions and employers and generally on ensuring that a place works as a good proper team that is well motivated, well skilled and well equipped.

An excellent recent publication—referred to, I was pleased to hear, by the Minister—by ACAS on productivity highlights some of these factors. In too many British companies, there tends to be a premium on financial engineering as the core competence. The finance function tends to rule: the accountant is king in the decision-making process. It is a bit like making the scorer the captain of the cricket team. Add to this the strengthening view that sees the firm as a contracting unit, with the employment contract no different from other contracts—a market transactional relationship. The result is a growth of non-standard contracts—zero-hours contracts have perhaps been most in the news recently. Self-employment is growing. The Uber kind of employment relationship is also developing in many areas. These are not conducive to high-skilled, high-commitment workplaces. They may work in certain service trades, but they do not work in factories doing difficult things, nor in services that need to be provided consistently to a high quality over many months and years. This is, if you like, the dark side of the much-vaunted flexible labour market.

Indeed, any attempt to rebalance the economy or develop an industrial strategy without taking the workplace centrally into account will end in failure, as too many initiatives have done before. The emerging picture is that of a UK that is too often pressing workers to work harder and longer, not one where the emphasis is on employees being encouraged to work more skilfully and to be smarter in the way that they approach things. Not enough of our firms are seeing the clear link between improved productivity and workplace-management approaches to their employees. I believe that central to any such strategy that involves improved workplace relations is dialogue. In successful examples of high-productivity workplaces, managers working closely with union representatives has often been key to improvement.

Hardly a week goes by without seeing pictures of the Chancellor in a hard hat visiting a successful factory. I hope he recognises from these visits the constructive role that unions have played in companies such as Rolls-Royce, Airbus, BAE, GKN and all the car plants, in improving productivity and performance. Instead of encouraging more of that, I am sorry to say, the Government are again attacking unions through the Trade Union Bill, soon to come to this House. Clouting unions is not the best route to high performance. Instead, the way to go is developing social dialogue arrangements to deal with issues such as skills and work organisation, as they do as a matter of course in some high-productivity countries such as Germany, the Netherlands and Sweden. It is time to bring our corporate governance arrangements more into line with those practices, even to the stage of having more diverse boards, not focused just on the short term but including other interest groups with a longer-term perspective, because they work there or they have a factory located in the relevant city or area. That seems to me very important.

Study after study has shown that consultation and involvement in workplaces bring improved job satisfaction and performance. Therefore, I ask the Minister, building on his talks with ACAS and Sir Brendan Barber, to fill in the gaps in the document and bring employment relationships much more into the debate that we are developing on this very important subject of productivity.