Lord Mandelson: Mansion House Speech
Peter Mandelson, 01/03/2010
Category: Economic Policy
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.
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.
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.
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.
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!