Foreign Ownership of UK Assets

Lord Monks Excerpts

Thursday 19th November 2015 Lords Chamber

[Lord Monks (Lab)]

My Lords, I add my thanks to my noble friend Lord Hanworth for initiating a debate on a very important subject. It deserves a more prominent slot than we have given it. It is a subject to which not enough attention and debate is given. With the different views already expressed, noble Lords have heard some things that are rather close to the heart of the way this country earns its living and whether it is on the right path.

I used to be one of those who did not really mind about foreign ownership. We did not need to bother about it too much. We owned a lot of assets abroad. We were doing quite well out of remittances from those. Companies that were overseas-owned were in many cases rather successful in the UK, providing a lot of employment. As my noble friend Lord Haskel just reminded us, they were in many ways leading on innovation, technology and productivity. The trends have now accelerated. I am much more worried about it than I ever was before. As my noble friend Lord Hanworth pointed out very well, the stark fact is that British companies are being sold off at a higher rate than we acquire assets elsewhere. Worse, there is little sign that the proceeds of this Great British sell-off are going into British business, to grow great new businesses that slot into the spaces that others have departed from. Therefore, this is an extremely important debate. The country has turned a blind eye to it and adopted a rather laissez-faire approach. In some ways that has suppressed creative thought on the issues. What do I mean by that?

It is interesting to note that last week and previously, this House has spent a considerable amount of time debating national sovereignty. Noble Lords, particularly on the other side of the House, have been “banging on”—to pinch a phrase from the Prime Minister—about that in the context of the EU Referendum Bill for a couple of weeks, and we will spend a lot more time on it in the next 12 months. However, they are talking about sovereignty only in the context of parliamentary sovereignty. They are not debating the business sovereignty that we are talking about today. They are not debating the fact that British businesses are increasingly foreign owned, including those occupying the commanding heights of utilities and key sectors. I am always interested to see whether any of the Europhobes or Eurosceptics say anything about this great sell-off when they go on about sovereignty. We obviously mean different things when we have this discussion.

I believe that EU membership enhances sovereignty, extends influence and boosts our reach on global developments such as trade and the environment. But these are all at risk if our economy becomes more and more anorexic. We have already lost a lot of ground. You cannot say that it is the EU’s fault or it is due to Europe’s sclerosis. It is our fault. Our system is out of step with those of many other countries. Some great and successful British companies—not the flops—have simply vanished into the entrails of foreign companies. However, the car industry has been transformed by foreign ownership, for which I am extremely grateful. By the way, sometimes even smaller companies, such as Pilkington and British Oxygen, have been acquired by foreign owners. I do not recall hearing any murmurs—not even a squeak—from the nationalists about what was going on when Pilkington was bought by the Japanese and British Oxygen by the Germans.

I stress that I am not an economic nationalist or a protectionist. I am grateful to the firms that have come in, particularly the car firms, and many others, for what they have done for the UK. Without that foreign ownership we would not have the industries we have. None the less, why is it that we rely on foreign ownership to control so many of our major industries? Why are there so few UK world-class multinationals, particularly manufacturing multinationals? I say to the noble Lord, Lord Desai, that from the privileged position of the south-east of England it is a lot easier to make the case he did than it would be in the north, where it is much more evident that the great companies have retreated or disappeared and foreign investment has not filled all the gaps, although it has filled some. Some great companies, such as Rolls-Royce and GKN, are obviously exceptions to this but they are not the rule. However, you can see how fragile the situation can become for a great company such as Rolls-Royce when a few things start to go wrong. It is not just Volkswagen that has ethical dilemmas and problems at the moment. We know that some of our companies have problems. The banks have been mentioned and Rolls-Royce is struggling a bit at present.

All the evidence is that, however benevolent foreign-owned companies are, however much they intend to be good corporate citizens, inevitably, the profits tend to fly overseas to where the strategic decisions are taken. Understandably, those who control the companies are biased in favour of their own country, city or region, just like we used to be. Now, we lack companies that can do that on any scale outside those in London and the south-east.

Why are we in this position? I tend to agree with the noble Viscount, Lord Hanworth—that a lot of it has to do with the powerful financial services sector, which seems to know a lot more about value extraction than value creation. It is primarily interested in promoting deals—takeovers, flotations, privatisations, restructurings and so on—to earn commissions and fat fees, and the volume of transactions is absolutely everything. The objectives of these deals should be encouraged to be more market share-boosting, rather than for short-term shareholder value extraction. This is deeply inconvenient to many in the City, but those people should reflect on the fact that many acquisitions actually result in a reduction of shareholder value.

Short-term shareholder value has become something of a curse. I note with interest that the boss of General Electric, who invented the term in the 1980s, has repented and recanted and said that it cannot be the sole goal of companies. The financial services world needs to get some new criteria to judge businesses by. I am a strong advocate of market share being one of the features. The pressure to deliver short-term returns provokes risky strategies, almost all linked to deals on acquisitions or restructurings rather than launching fresh major innovations and investments. Linking executive bonuses to short-term shareholder results just intensifies the pressures.

It is a very hard world for British companies, given this financial culture to grow, be successful and thrive. Some have stayed private and have managed to do so: Dyson and JCB are fine examples. Others trust in private equity. Well, good luck to them, I hope it works for them. Others have become and remain plcs, but in that sector you have to be very good to avoid being vulnerable to the prowlers and takeover merchants. Very often, those are people in the City trying to promote somebody to come in and take you over.

Some in government and business have recognised this problem. I pay tribute to Vincent Cable and Paul Polman of Unilever. But most shy away from an issue that is marked “too difficult”. Along with Civitas, I think we should be looking at American anti-takeover statutes and that little poison pill that can prevent a hostile takeover in certain states. We should be looking more at German cross-ownership. I know it used to be called a cartel and perhaps there is a degree of that; none the less, it means that great companies survive bad times. I will say this about Volkswagen: it will survive this very bad time. I was more worried that BP might not survive its very bad time in the Gulf of Mexico in the context of our financial markets. I am also interested in the French and Nordic multiple or weighted voting systems to discourage hostile takeovers. Like the noble Viscount, Lord Hanworth, I am rather a fan of two-tier board structures, with stakeholders involved in the supervisory board.

We are alone in extending the idea of a free market in goods and services—for many people, an act of faith since Cobden and Bright—to a free market in the ownership of companies. We are also alone in confusing foreign investment in new plant, such as by Nissan, with hostile takeovers, such as by Pfizer. We know that companies such as Pfizer are very likely to run down the British arm to reduce competition and costs and to extract—that word again—intellectual capital.

This is not an issue that is particularly easy to resolve. I have no simple solutions but, for a start, an anti-hostile takeover law could be extremely useful in trying to shift the cultures in the UK towards longer-term, more sustainable success. After all, that is the kind of company that Tata and the best companies coming into this country are—not short-termist but long-term players. We want more companies of our own like that, so that we are not completely dependent—to the extent that we could become dependent—on foreign ownership. There is nothing wrong with foreign ownership but it does need a sense of proportion.