Foreign Ownership of UK Assets

Earl of Courtown Excerpts

Thursday 19th November 2015 Lords Chamber

[The Earl of Courtown (Con)]

My Lords, this has been a fascinating debate with incredibly varied speeches from many different areas opposite me; I am saddened only because some noble friends were unable to be here for this debate. It has been of great interest and some fascinating speeches have been made.

It is right that we continue to consider how best we can help UK companies to support growth in the UK and remain competitive, both within Europe and globally. I will set out today how the UK achieves this through a flexible framework of regulation that supports growth by attracting important overseas investment while ensuring that legitimate public interests are protected.

As the noble Lord, Lord Desai, said, the UK has always been a trading nation. Throughout history, trade has brought great prosperity to the United Kingdom. The UK is negotiating ambitious trade agreements with our established markets, such as the United States; emerging markets, such as Vietnam; and the world’s poorest markets, as a way of supporting their economic development. My noble friend Lord Maude, as the Government’s lead on trade policy, works hard to ensure that the European Commission is pursuing the right agenda—both the right negotiations and the UK interests within the negotiations. He particularly champions increased pace in EU trade negotiations. Completing all ongoing EU trade negotiations could add more than £20 billion to the economy each year. Every delay has a cost. Concluding trade negotiations allows our goods to enter markets at reduced or zero tariffs, reduces the requirements for multiple testing, protects UK firms’ intellectual property in markets, opens up procurement and services markets and protects our investments overseas.

I now turn to the benefits of the United Kingdom’s strong track record on inward investment. High-quality foreign investments are very important for the United Kingdom economy. Foreign-owned firms now account for nearly 40% of total output in the UK, as mentioned by noble Lords. Around a quarter of United Kingdom private sector employment is with foreign-owned firms. The United Kingdom is the number one destination for foreign direct investment in Europe. The total value of UK inward foreign direct investment stock reached a record £1 trillion as of the end of 2014, the highest in Europe and third in the world, behind only the USA and China.

Over the last five years, UK Trade & Investment recorded more than 8,000 successful inward investment projects in the United Kingdom, which have brought with them nearly 600,000 new and safeguarded jobs. In 2014-15 alone, UKTI recorded a total of just fewer than 2,000 inward investment projects, 12% more than in the previous year. These investment projects are estimated to have brought with them almost 108,000 new and safeguarded jobs over the last year.

Inward investment plays an important role in supporting growth across all parts of the United Kingdom, and last year saw strong investment and jobs growth in most regions. During 2014-15, England, excluding London, received the highest number of FDI projects, followed by London, Scotland, Wales and Northern Ireland. These results confirm that we have the right approach. International companies see the strength of the United Kingdom as a place to do business and, in many cases, the place to locate their international or European headquarters. However, we need to continue working hard to make the United Kingdom the best place in the world for starting and growing business and the Government are committed to creating the conditions necessary to grow the economy and allow business to expand, thrive and create lasting jobs in the United Kingdom.

Given the significant benefits of foreign investment and open markets to the United Kingdom economy, the United Kingdom’s corporate governance framework does not seek to constrain investment from overseas in UK companies. Nor does the framework seek to stop UK investors investing overseas. The UK has been a leading influence internationally in the development of company law and corporate governance over 150 years and the UK’s corporate law and governance framework continues to be recognised as world-leading. This legal and regulatory framework is ultimately about enabling business to succeed: it provides the certainty needed to facilitate trade and attract investment in the United Kingdom.

The UK takeover regime is subject to the EU takeover bids directive, which sets out common minimum standards across the EU for the conduct of takeover bids for companies whose shares are admitted to trading on a regulated market. There is some permitted variation in how the directive is implemented in different member states, reflecting the wide variety of corporate governance and shareholder models and, indeed, patterns of shareholding across different member states. These factors influence the landscape for mergers and acquisitions.

The European Commission published a review of the application of the directive by EU member states in June 2012. The review concluded that, generally, the regime created by the directive is working satisfactorily. Currently, there are no plans for significant changes to the directive itself. The European Commission review also included a study comparing the EU framework with a number of other major jurisdictions. It showed that takeover bid legislation in the other countries is based on principles similar to those in the EU directive.

The benefits to the UK economy of being open to inward investment are clear. It is therefore important that the United Kingdom creates an environment where investors can invest with confidence. A cornerstone of this is ensuring that mergers are, in the most part, assessed not by politicians but by an independent authority with access to high-quality evidence. In the main, consideration of mergers and takeovers in the UK is handled by the independent Competition and Markets Authority or the European Commission. They will look to see whether any competition concerns arise from a proposed or completed merger or takeover.

Member states’ systems are distinct and operate in different ways but the underpinning EU rules are the same. If a takeover or merger gives rise to legitimate matters of public interest other than competition, UK Ministers, like their European counterparts, have formal powers to intervene. The Government use these powers in exceptional cases to ensure that UK interests are protected; for example, where there may be national security issues. The grounds for using these powers are constrained by EU law to avoid damaging the transparency and predictability of the regime to the detriment of investor confidence and the economy as a whole.

As I have already set out, the UK’s approach to inward investment gives us a competitive advantage over other, more interventionist, regimes. However, there is more to do. We need to reduce regulatory burdens and empower our businesses to compete more effectively by accelerating the integration of the single market, especially in the services and digital sectors. We continue to focus on the importance of freeing businesses from the constraints of overly burdensome EU rules. We want regulation which achieves its objectives more efficiently and proportionately, without imposing unnecessary costs; in some cases this means exempting microenterprises or start-ups.

The noble Viscount, in his introductory speech, commented on the role of manufacturing in the UK economy. We must remember the contribution that manufacturing makes to the UK economy—now £171 billion—which is significant and increasing over the long term. We manufactured a greater volume of goods in 2014 than in any year since 2008, the start of the global downturn/recession.

The Government are also setting the economic conditions to enable business to invest in the technology and skills it needs to compete and to deliver productivity growth. The productivity plan sets out the Government’s approach to delivering productivity growth, and the approach to working with industry focuses on: supporting businesses to invest, grow and prosper in the UK; promoting the UK as a world leader in disruptive and emerging technologies; and making Britain the best place in the world to start up and grow a business. Driving innovation, rolling out further deregulation, promoting competition, boosting skills and strengthening exports will be central to meeting these objectives.

The noble Viscount also commented that other countries are able to intervene in mergers and takeovers that are not generally in their own national interests. Consideration of mergers and takeovers in the United Kingdom is handled by the independent Competition and Markets Authority or the European Commission, as I mentioned earlier. If a takeover or merger gives rise to legitimate matters of public interest other than competition, UK Ministers have the formal powers to intervene. It is not the case that other EU member states have greater powers to block mergers and takeovers on public interest grounds.

The noble Viscount and the noble Lord, Lord Monks, said that the Government should mandate that employee representatives should be on company boards—basically looking at a two-tier board system. As noble Lords will know, under the current law there is nothing to stop companies having employees on boards, and the Government do not believe that it would be appropriate to mandate this arrangement. It should be a matter for companies to decide. Under law, the unitary board system means that all directors, including those representing employers, have the same duties and responsibilities, and we do not see that there is a case for moving to two-tier boards. As the noble Lord, Lord Desai, mentioned, the current governance issue at Volkswagen illustrates that the two-tier system is no guarantee of good governance. The Government believe that effective engagement with employees is a vital part of good corporate governance.

Noble Lords went on to discuss the current account and the balance of payments. The recent weaknesses in the current account deficit have been driven by a fall in income earned by UK residents on their foreign direct investments abroad. Relative weaknesses in economic activity among the UK’s trading partners, especially in the euro area, have depressed returns on the UK’s foreign assets. The current account deficit narrowed in Q2 to minus 3.6% of gross domestic product from minus 5.2% in the previous quarter. This has been the smallest quarterly current account deficit over the last few years.

The noble Viscount also mentioned the Kay review. This found issues relating to short-termism in UK companies, including the tendency to pursue short-term takeovers, which undermine UK companies. Her Majesty’s Government’s response to the Kay review acknowledged that short-termism among equity investments has affected long-term investment by UK companies. We have made considerable progress not through regulation but by working with companies and investors to encourage engagement between them with a focus on long-term company strategy. Good progress has been made with, for example, the establishment of the Investor Forum, as recommended by Professor Kay, to promote such engagement. Building on this progress as part of the Government’s productivity plan, leading investors are now developing action plans for long-term investment.

The noble Lord, Lord Haskel, said that foreign investors should adopt a stewardship approach. I agree, but it is important to note that United Kingdom asset managers invest on behalf of savers from all over the world. Many of our asset management firms have led the way on adopting a long-term stewardship approach, responding to the challenge set out in the UK stewardship code, overseen by the Financial Reporting Council. They have also set up the Investor Forum in response to the Kay review, as I have already mentioned. The Government believe that these investors have an important role in ensuring that companies focus on long-term investment and not just short-term market value.

A number of noble Lords mentioned sovereign wealth funds. In the summer Budget 2015, the Chancellor announced that he would bring forward a proposal to establish a sovereign wealth fund from shale gas revenues to ensure that local communities share in the economic benefits of shale gas developments in their area. More details will be set out in the Autumn Statement.

The noble Viscount commented that the Government are focusing on foreign investment and congratulating themselves on their performance. Foreign-owned firms account for nearly 40% of total output in the United Kingdom. Over the last five years, foreign direct investment has created or safeguarded nearly 600,000 jobs in the United Kingdom.

There was also the comment that foreign-owned firms have higher productivity. This is an issue that everybody is aware of, the object being to improve the financial situation so that productivity can increase. Yes, foreign-owned firms do have better productivity, and that is one of the main benefits of foreign investment. Incoming knowledge, technologies and innovation can spill over to other companies and supply chains, contributing to overall UK productivity growth.

The noble Lord, Lord Haskel, said that growth has become unbalanced, with too much emphasis on the financial sector. The Government have a comprehensive plan to rebalance the economy and strengthen every part of the United Kingdom, and to create a northern powerhouse by bringing together the great cities and counties of the north of England. That is alongside plans to support other vital economies in the UK, such as the Midlands and the south-west.

According to the latest data, output per head grew faster in the north than in the south in 2013. The north-east, north-west, West Midlands and Wales all grew faster per head than London and the UK average. Her Majesty’s Government will go further by supporting the resurgence of strong city regions through devolution, enabling cities to work together to take responsibility for their own economic success.

The noble Lords, Lord Haskel and Lord Mendelsohn, also mentioned the Pfizer interest in AstraZeneca as being an example of corporate investment short-termism. I do not believe that this is the case. On the contrary, AstraZeneca’s directors resisted, arguing that it was not in the long-term interests of shareholders. The majority of investors accepted this view and, as a result, the bid was rejected by shareholders.

A flexible, open marketplace that supports and encourages investors, including foreign direct investment, helps to deliver a successful UK economy. The UK Government’s flexible framework of regulation, which supports growth by attracting important overseas investment while ensuring that legitimate public interests are protected, plays a key role in ensuring that we are a productive and growing nation.

[Viscount Hanworth]

My Lords, this has been an interesting debate in which we have heard a diversity of opinions. I wish to thank all speakers for their various contributions. I must also thank the Minister for his judicious summary. On Tuesday, he was kind enough to tell me of the nature of his brief, which informed him that there were no problems whatsoever with inward financial investment. In return, I promised not to take him to account for being so seriously misinformed.

[The Earl of Courtown]

My Lords, the noble Viscount has mentioned something that was said outside this Chamber. I feel that that is a little unfair.

[Viscount Hanworth]

I believe that the Minister also said the same thing in the Chamber. Be that as it may, I thank him for his response.

The Minister who bears responsibility for these matters at present is the noble Lord, Lord O’Neill. I trust that this debate will be brought to his attention.