CHECK AGAINST
DELIVERY
LORD MANDELSON - MANSION HOUSE SPEECH - LONDON, 1 MARCH 2010.
One year on
My Lord Mayor, My Lords, Ministers, Aldermen, Mr Recorder,
Sheriffs, Ladies and Gentlemen.
The benefit of giving this speech two years running is that it
gives me a very clear yardstick to work from.
A year ago we were deeply in recession, the dust barely settled
from Lehmans and the immediate consequences of its failure.
Now we have returned to growth. The banks are stabilized. Nobody
is hanging out the bunting for a modest 0.3%, and the road ahead
is certain to be bumpy.
But the reality is that the worst predictions about where the
credit crisis would leave us have not been realized. Not because
it was wrong to anticipate the worst. But because massive, indeed
unprecedented, government intervention pulled a spiraling private
economy back from the brink.
A year ago I stood here and said that I believed that the Britain
that emerges from the credit crunch would be a different country.
For one thing - although this is not what I had in mind - we are
a country now unavoidably in significant debt. How we respond to
that fact has been the source of some debate, and some rather poor
argument, and I want to address that tonight.
But more fundamentally, what I argued a year ago was that we
needed to recognise that the crisis, like all crises, reveals both
what is strong and what is weak in our foundations. And we should
not waste the crisis by failing to tackle the weaknesses.
Our strengths are our flexible labour market, keeping
unemployment much lower than projected. Constructive labour
relations have allowed many firms to reach deals on pay and hours
that protect jobs. I applaud those who have made sacrifices. They
are the true heroes of the recession.
The rate of business failure has been half that of the recession
of the mid-nineties. Half as many homes have been repossessed in
this recession.
But we have also been brought face to face with some new
realities.
Starting in the 1980s we allowed the diversity of the British
economy – or lack of it - to approach the limits of what was
prudent. Sometimes there was an economic fatalism about
manufacturing decline and falling British goods exports, rather
than seeing them as something that policy and private enterprise
should address.
Our economy, and certainly our corporate tax base, became too
dependent on the City. We were also carrying a huge hidden
insurance liability for a sector that was taking badly understood
and inadequately policed risks.
And I think we are now also asking some very far-reaching
questions about the values and outlook that we need to embed in
our businesses and economy if we are going to prosper in the long
term. The Lord Mayor was right to say that rebuilding confidence
in the City has to be central to our recovery.
We will need a smarter and more affordable state, but we also
need a private sector firmly focused on long-term productive
investment, enterprise and corporate stewardship.
The debate that is happening within business on business models,
especially the reliance on debt over equity, needs to be part of a
wider reassertion of the values of the long term, of organic
growth and value creation over the temptations of excessive
leverage and the fast buck.
One of the big problems behind the credit crunch was a sort of
financial abstraction. People and companies bought and sold
financial assets with little regard to the real assets they
represented.
At the centre of financial markets is the tension between the
need for long term investment in a real asset, and the desire for
short term gain from a financial asset. Should the prerogatives of
the latter trump those of the former? What kind of economy will we
end up with if they do? We have to address these questions.
Public Debt
We need in this country “a new model of economic growth that is
rooted in more investment, more savings and higher exports” - a
“supply side revolution”. Not my words, but a direct quote from
the Shadow Chancellor’s Mais lecture of last week.
It was a lecture longer, in my view, on assertion, than specific
proposals. Except, of course, on the deficit, where he could not
have been clearer: cut now, this year, regardless of the fragility
of the economy.
On the assertions, Mr Osborne is, I believe, wrong to try to
present a picture of Britain as being uniquely among the
world's economies in facing a public deficit issue and to
suggest we are on the brink of it becoming unmanageable.
The fact is we entered the global crisis with the second lowest
debt of any nation in the G7. And the global crisis has left
government balance sheets across the world in a worse state, as
they have absorbed the economic shock and sustained economic
activity.
Britain is hardly alone in seeing its public finances ravaged by
the financial crisis. According to the IMF, in 2010 public debt as
a proportion of GDP is forecast to be higher in Japan and Germany
than in the UK. It is far-fetched – not to say unpatriotic! - to
argue that Britain is facing a Greek-style funding crisis.
Which is why it is also wrong to assert that the fiscal stimulus
and need to borrow must necessarily push up interest rates. While
that must always be at the back of our minds, in reality, the
shock to economic demand is so deep that the economy needs both
continued fiscal and monetary stimulus. To cut public spending now
as the Shadow Chancellor proposes could easily plunge the economy
back into recession.
This is not an attempt to dodge the need for sometimes painful
public spending cuts: they will come when, but only when, the
return to growth is secure. The IMF, the OECD, the IFS: they have
all sounded a warning about undermining the recovery.
But the Government’s analysis is not just about locking in
recovery. A credible commitment to reduce the deficit and pay down
debt also requires a credible plan to achieve medium term economic growth.
Growth
Any would-be administration that fails to present a credible
growth plan alongside its deficit reduction plan has a big hole at
the centre of its programme. In this respect Lord Mayor, I take
your challenge, all five points of it.
Growth depends on continued active government support for
business, including new public-private forms of growth and venture
capital for high tech and growing SMEs. Especially when banks are
risk averse and focused on – indeed being urged to - repair their
balance sheets.
Government needs to lend its energy to the stimulation of new
innovation and enterprise from our world class research base and universities
We need to ensure that in a period of reduced funding our
universities give increased priority to STEM subjects, and to
commercialization of research, and that our skills system provides
advanced apprenticeships and technician training to serve the new
industries of the future
We need to mobilise private and public investment behind the
Britain’s infrastructure needs and to boost our national supply
chain – in digital, in energy, in transport and in low carbon
transition.
A “supply side revolution” will remain what it is – a good
soundbite – unless it is built on an understanding of the positive
role that public investment can play in partnership with business
to build Britain’s economic future.
Since we published the New Industry New Jobs policy
framework last year, the Government has earmarked almost a billion
pounds for targeted investments in Britain’s basic capabilities in
new technologies like composites, plastic electronics and
industrial biotech – the kinds of game changing seed investment
that markets too often see as unviable or too risky in the
short-term.
We have the biggest demonstrator programme of its kind in the
world for ultra low carbon vehicles in Britain – publicly funded.
We have announced both support for charging infrastructure and for
consumer subsidies for the first generation of mass market
vehicles next year. The result: Toyota and Nissan have both
announced their intention to base new low carbon operations here.
Britain comprehensively missed the boat in onshore wind power
generation two decades ago. But we have partnered the wind and
wave energy sector in making sure that our natural comparative
advantages in offshore energy are exploited this time around. The
result: FCC, ClipperWind, Mitsubishi, – all have chosen to invest
in renewable energy in the UK.
Domestic companies such as David Brown and Skykon are taking
advantage of these opportunities as well. No other country in the
world makes turbines of the size of those now being developed in
the UK on a commercial scale.
These are just two sectoral examples of the way that a more
proactive approach to building our industrial strengths can and
will pay off if government has the confidence to act at
near-to-market stages of development and help to identify and pull
away the barriers to commercial viability.
The great slur on British manufacturing has always been that it
can’t cut it in a world dominated by China and Germany. This is
utter nonsense.
Britain is the world’s sixth largest manufacturer and our
manufacturing output has remained stable in both value and volume
over the last decade despite the fiercest imaginable competition.
It remains absolutely central to our export strength.
But if we want to maintain those strengths we have to pioneer
advanced technologies and keep investing in the science, research
and skills that underwrite them.
Companies
We also need entrepreneurs and companies capable of
commercializing and transforming these capabilities. And that is a
process that requires commitment and innovation. It requires
strong and competitive companies.
Our basic answer to this challenge in Britain for the last three
decades has been to focus on subjecting companies to the
discipline of the market and removing the market barriers that
prevented them responding.
Industrial relations were reformed. The deepening of the European
Single Market and the development of global capital markets
created intense discipline for management. Government took a
neutral view on foreign ownership and welcomed foreign investment
into Britain.
These developments have been almost entirely beneficial. They are
probably the single most important reason why we still have a
motor manufacturing industry, for example.
The massive expansion of capital markets, and widespread public
share ownership through pension and saving plans have changed the
game significantly. And ironically the costs of this change are
closely tied to its advantages.
We can entrust our share ownership to intermediaries, which is a
good thing, because most of us don’t have the time or expertise to
make investment decisions. And we spread our share ownership
across hugely diversified, often international, portfolios, which
hedges us in most circumstances against market risk.
But the result of intermediation and diversity has been to turn
most shareholders into absentee or transient owners of companies.
The decisions about what to own and when are made by fund managers
whose incentives may require them to deliver returns on short
timeframes, even if they manage pensions for people whose key
interest lies in the long term.
For companies, the pressure to deliver short-term share price
gains too often has to come before any wider considerations. In
fact if CEO remuneration is tied to share price movements, simply
raising the share price can become a corporate strategy in itself.
Market analysts may be as likely to be involved in a
sophisticated game of predicting the next press release and share
price movement as they are in assessing the long-term strength or
weaknesses of firms.
This risks rewarding clever readers of the market more than
industrial innovation, quality management, or entrepreneurial
skill. On the face of it, it does not seem a model good at
building companies with the patient but engaged ownership required
for low carbon innovation or infrastructure investment or
manufacturing on the back of new technologies in Britain.
In recent years the UK Government has carried out a number of
significant reforms to encourage the right kind of long-termism
among company directors, not least the directors’ duties in the
2006 Companies Act.
We need an equivalent long-termism among company owners,
especially institutional shareholders. These company owners need
to combine short term activism on company strategy, with long term
commitment to the development of the companies they own.
Christopher Hogg’s review of corporate governance and David
Walker’s review of banking boards have started to pose the right
questions. The UK’s Stewardship Code must emerge stronger from the
current consultation.
It should make it clear that subscribing fund managers and
ultimate owners have a duty of engagement and that long term
stewardship must be at the centre of the fund manager’s mandate,
and that indeed, this has to be demonstrated in reporting. I think
there is a case for making fund managers publish the terms under
which they are paid and the goals they are working to.
Takeovers
In this context, I think we need a fresh look at mergers and
acquisitions.
In some ways the current system is good at defining director and
shareholder duties where the ownership is relatively
stable.It is less clear how those duties should be
interpreted in the fast-moving circumstances of a takeover.
Nobody believes that poorly performing management should be
protected. But the open secret of the last two decades is that
mergers too often fail to create any long term value at all,
except perhaps for the advisors and those who arbitrage the share
price of a company in play.
A lot of M&A advisors must be sleeping badly in that
knowledge. Or maybe not.
And it seems to me that given that a takeover can have huge
implications for workforces and communities as well as investors,
this is an area where good governance, and active and responsible
shareholding, are absolutely critical. I do believe that there is
a strong case for throwing some extra grit in the system.
This is true for us in particular because the UK has a very open
market for corporate control, arguably the most open in the world.
And it is in our interest to make sure that this openness is
producing sound outcomes.
In the case of Cadbury and Kraft it is hard to ignore the fact
that the fate of a company with a long history and many tens of
thousands of employees was decided by people who had not owned the
company a few weeks earlier, and probably had no intention of
owning it a few weeks later.
Company Directors engaged in takeovers clearly
have a legal duty to shareholders. For the Directors of the target
this is often interpreted as meaning a duty to accept any price
that exceeds their own assessment of the future valuation of the
company.
However, the Companies Act sets out the duties of directors to
consider the best outcome for a company in the long term,
considering the interests of all the stakeholders – employees,
suppliers, and its brands and capabilities. Getting a higher price
in a takeover may not be perfect proxy for that.
It seems to me that we need to have a debate about how these
various duties should be understood in the fast-moving
circumstances of a takeover, when some of the company’s newest
shareholders may not have a long term commitment to the company.
Obviously we need Directors equipped to be stewards rather than
just auctioneers. If this requires re-stating the 2006 Companies
Act, then I am willing to do that.
I believe that one of the key ways to strengthen consideration of
these wider issues in takeovers is to strengthen the ability of
all shareholders on both sides to scrutinize the
planning, financing and intentions behind deals.
For that reason I welcome last week’s decision of the Takeover
Panel to consult on the provisions of the Takeover Code, following
Roger Carr’s sensible suggestions reflecting his Cadbury/Kraft
experience. I believe that there is a case for:
- Raising the voting threshold for securing a change of ownership
to two thirds;
- Lowering the requirement for disclosure of share ownership
during a bid from 1% to 0.5% so companies can see who is building
up stakes on their register
- Giving bidders less time to “put up or shut up” so that the
phoney takeover war ends more quickly and properly evidenced bids
must be tabled.
- Requiring bidders to set out publicly how they intend to
finance their bids not just on day one, but over the long term,
and their plans for the acquired company, including details of how
they intend to make cost savings; and;
- Requiring greater transparency on advisors’ fees and incentives.
I also think there is a case for requiring all companies making
significant bids in this country to put their plans to their own
shareholders for scrutiny. Kraft after all had to bend over
backwards to avoid asking Warren Buffet for his binding opinion,
although I think we all got his message.
None of these measures would necessarily have prevented Cadbury
changing hands – that is not the point. They would have enabled
the owners of both companies more actively to scrutinize the
transaction, and better weigh the long term prospects for the
merged company.
Some people have gone further and suggested that we need a new
form of public interest test to guard British companies against
foreign acquisition. I am happy to have an open debate about this,
but I think we need to be very cautious about this.
Britain benefits from inward investment and an open market for
corporate control internationally. A political test for policing
foreign ownership runs the risk of becoming protectionist, and
protectionism is not in our interests.
We already have certain EU and UK rules that protect the public
interest in a change of corporate control. A public interest test
already applies to questions of competition, public security,
media pluralism and - in the UK - financial stability.
These rules have evolved over time – most recently to absorb the
concept of financial stability. They are not immutable, and as I
said I am open to debate. But we must not get drawn into a narrow
debate about foreign ownership, which is not the issue. More
important is the need for reform to promote corporate stewardship
and long term engagement and ownership amongst shareholders,
boards and their directors.
Conclusion: renewing the standing of the City
Let me say in conclusion that it strikes me that one of the
biggest risks following the banking crisis is the development of
an unhealthy attitude towards business and open markets in general
– Richard Lambert pointed this out a few weeks ago.
People who are losing their own jobs find it jarring when many in
the City are reported as having had a good year. And that the
biggest individual beneficiaries of the bailout seem to be bankers
themselves.
But to jump from this to the conclusion that the whole market
economy has failed us is a dead end, politically and practically.
Our future depends on us harnessing markets and private enterprise
for the good of all.
Britain’s economic recovery will not be driven by consumer debt
or public spending. It can only be driven by private enterprise
and investment, backed by active and strategic government.
And Britain remains a very good place to do business. The World
Bank ranks us 1st in Europe and 5th in the world. I realize that
the changes made to personal taxation at the top end are not
popular with business. But in the circumstances they are fair and
justified for now. Our corporate tax rate and capital gains rates,
especially for entrepreneurs, are competitive and need to remain
that competitive.
As we recover there is an understandable temptation to respond to
a clear regulatory failure in the banking sector with substantial
new regulation.
Of course we need to make our banks safer, and the Government
made early proposals for reform. However, I do think that we need
to guard against any unintended consequences from the new capital,
liquidity and leverage requirements which are being proposed from
different directions. As the Prime Minister has stressed, these
need to be fully internationally coordinated.
New rules need to be implemented in a way, and on a timeframe,
that does not create uncertainty now and which does not put at
risk the ability of the banking system to fund the credit needs of
the global economy as we recover.
At the moment, the current low demand for credit is masking the
issues concerning credit supply. But as the recovery strengthens,
we must avoid banks shrinking their balance sheets to meet
regulatory requirements at the expense of lending to the viable
businesses that we need to drive the recovery.
But alongside this we need to recognize the need for renewed
belief in the City’s role at the heart of our economic life.
We need to rebuild confidence in the City and Britain’s corporate
leadership – and I know the City accepts and advocates this. I
realize talking about trust probably sounds rich coming from a
politician. Let’s just say: I feel your pain.
The City is an immense asset to the UK and a key comparative
advantage of our economy. It will be critical to financing the
recovery and critical to financing our future growth.
Alongside regulating to strengthen the stability of the finance
sector we also need to have a debate about culture. It is about
the City leading the debate on a new ethic of stewardship and
long-term commitment as the way to economic strength.
There will no doubt be plenty of people who regard such comments
as unduly idealistic or even naive. I’m enough of an optimist to
believe they are not and that the changes we need are eminently
achievable.
I’m also, my Lord Mayor, enough of an optimist to say I’ll be
back next year to see if I’m right!
Contacts:
BIS Press Office
NDS.BIS@coi.gsi.gov.uk