§ 5.31 p.m.
§ Lord Laing of Dunphail
rose to call attention to the importance of an equitable balance in industry between the interests of capital and all other stakeholders and to the need for capital management to evolve so that it will continue to benefit the national community in the 21st century; and to move for Papers.
The noble Lord said: My Lords, I am delighted and honoured that time has been made available to debate this Motion. I am especially pleased that so many noble Lords have decided to participate.
The material phrase in the Motion is "equitable balance". Finance and industry have a symbiotic relationship—we need each other—but distortion of the balance between those complementary but sometimes conflicting forces is a threat to success. During my lifetime the balance has changed from a creative partnership to a situation in which those who work in wealth-creating industry see institutional shareholders as totally detached from the realities of production and services; they seem to buy and sell blips on an electronic screen, to know the price of everything and the value of nothing, and are highly esteemed by our society for so doing. That perception may be exaggerated, but the purpose of this debate is to determine whether the balance needs adjusting and, if so, how that might be done.
I believe in the capitalist system. It is the most efficient means of generating real wealth for a community, but no economic system is without problems. Where problems are promptly identified, they can be promptly brought under more effective control but, in this country, signs of potential trouble are all too often ignored or misread so that corrective steps, when eventually taken, are taken too late and after much damage has been inflicted on the economy.
I am indebted to Professor Charles Handy for bringing to my notice a pertinent quote from Lord Eustace Percy in 1944:The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not recognised by the law. The association which the law does recognise—of shareholders, creditors and directors—is incapable of production or distribution and is not expected by the law to perform these functions. We have to give law to the real association and to withdraw meaningless privilege from the imaginary one. Here is the most urgent challenge to political invention ever offered to the jurist and the statesman".886 That challenge is no less valid today. Lord Eustace mentioned some of the stakeholders in a business, but there are others—and they include the nation itself. I wholeheartedly agree with Adolphus Green, the founder of Nabisco, who said that,the officer of every corporation should feel in his heart —in his very soul—that he is responsible, not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States".Sadly, the national interest seems to have slipped well down the list of priorities because managements feel they cannot afford to take it into consideration. There is a widespread belief in industry and commerce that institutional investors look for short term results and give little credit for a company's commitments to investment in technology, in training, in research and development or in building world market share, all of which would further the nation's economic interests. That is the fundamental reason for disquiet about the present relationship between providers and users of capital. The imminence of the single market gives urgency to this question—there could be no more opportune time to examine our structures to ensure that we are not marginalised because of our failure to invest enough. The president of the CBI said recently that we need to double our spending on investment and keep it at that level for the rest of this decade. I agree. But to do so could lead to a company's dividends being affected.
Given the attitude of the City to bottom line, the shares are likely to be marked down with an increased threat of takeover and predators claiming that "shareholders' assets were not being utilised efficiently". It is no coincidence that dividends from UK companies started to outpace profitability in the mid-1980s—in effect paying shareholders an advance loyalty bonus with their own money. If we continue to pay out to shareholders the funds which should be going to re-investment, we will never catch up with our competitors, the pound will remain weak within the ERM and our interest rates will have to remain high because they cannot be lower than those of Germany. Of course, long-term investment has also been inhibited by inflation leading to high interest rates. But I believe that a disincentive at least as strong is management insecurity arising from the apparent willingness of the City to sell any company to anyone so long as the price is right.
A small number of institutions dominate the UK equity market —the top 50 have over half the equity and a few dozen individuals make decisions in respect of many millions of shares. Those who exercise great power have a great responsibility to use their power wisely. Surely they cannot totally disclaim consideration for the national interest? Other countries seem to take a less exclusively profit-driven view. The French, for example, make no secret of their chauvinism. Unwanted takeovers are blocked either by government veto or by constraints in a company's articles of association, which are possible because their shareholders appear to recognise the importance of protecting the nationality of their major companies.
887 The mission statements of many German and Japanese companies place commitment to shareholders after commitments to quality, customers and employees. While I do not suggest that we could or should emulate everything they do, the co-operative relationship between their owners and managers would seem to have contributed to their international competitive success. Article 14 of the German constitution declares that ownership involves obligations and that its use should at the same time serve the common good. How different from the culture of Anglo-Saxon fund managers for whom ownership responsibility appears almost non-existent.
I understand the difficulties for financial institutions—they have their own shareholders to consider —and the publication of quarterly league tables encourages them to operate short term. What I do question is the wisdom of our society endorsing, encouraging and applauding it.
If we do not recognise that our totally free market in corporate control is seriously damaging to the nation, it could soon be too late. I have no wish to see a protective ring-fence around British industry, but I understand the French chauvinism, or what I would call loyalty, better than I understand our "take the money and run" approach. If too many of our major companies are sold to non-British owners, and free market forces make that more rather than less likely, then the UK would become increasingly a satellite economy. The geopolitical centre of Europe is likely to move eastward and when non-British boards come to consider the best territory in which to have their productive facilities, the UK will be at a considerable disadvantage. We could be drained of our brightest and best business leaders who will want to be based at their companies' power centres—which will not be in the UK—a lesson Scotland has learnt to its cost. Quite apart from self-interest, have we no pride?
So I very much hope that we can acknowledge that there is a problem in the balance and that the role and the responsibilities of capital need to be more clearly defined. There are a number of constructive steps which could be taken. For example, as recommended by the Select Committee chaired by my noble friend Lord Caldecote, voting rights could be restricted to shares which had been held for at least 12 months, a proposal which is being considered in some states in the USA. That would give a greater degree of security against damaging speculative dealing.
I am delighted that the Trade and Industry Select Committee in another place has put forward recommendations for changes in takeover policy and practice which include greater emphasis on public interest considerations when assessing whether or not a takeover should be blocked. That committee also recognises that the balance between bidding and target companies is weighted in favour of the bidder who can at present acquire nearly 30 per cent. of a company without having to disclose his intentions. The recommendation is that that level should be reduced to under 15 per cent.
The Government could also make constructive adjustments on the tax front. As far as I can ascertain, about half the institutional money presently invested 888 in the UK market is tax exempt—an encouragement to trade rather than to invest. There can be no justification for the exemption of pension funds from capital gains tax—indeed I should like to see a punitive tax on all short-term capital gains, and no tax on longer term gains.
This is a complex subject, but we should never lose sight of the fact that, apart from being aggregations of property, companies are social organisms in which men and women realise, or fail to realise, purposeful and productive lives. Their effectiveness and productivity are arguably the most important barometers of the effectiveness and productivity of a nation. There is surely something seriously wrong when, in the eyes of those men and women, the providers of capital appear to be playing a computer game with real money and real people's lives.
The problem is the divorce between ownership and control. Those who control the overwhelming majority of shares are essentially only agents, charged with managing the savings of millions of insurance and pension fund members—the real owners; and it is a sobering thought that employees' savings could be used to support a takeover bid which they oppose—for the company which employs them. They cannot be consulted on share buying or selling any more than were trade union members before their leaders cast block votes. The latter was deemed to be undemocratic and legislation was introduced to correct it. Can the one be wholly right and the other wholly wrong?
I believe in free enterprise, but freedom demands responsibility. Power has to be constrained by consideration of the greater good—we already have monopolies and restrictive trade practices constraints. In a society which seems to want instant gratification, may it not be time to restrain the virtually unfettered freedom of capital to dispose—if the price is right—of this country's asset base?
There is unlikely to be a simple remedy, but let us at least explore possibilities. Other countries manage things differently and achieve better results for their people. Let us not deny the value of some of their structures just because they were "not invented here"; and, to quote from the report of the Select Committee chaired by my noble friend Lord Caldecote:The most urgent need is for a change in our cultureI beg to move for Papers.
§ 5.46 p.m.
§ Lord Shackleton
My Lords, before I turn to the admirable speech that we have just heard, perhaps I may draw attention to the fact that we have, rather unusually, a maiden speech from a Peer who took the Oath only yesterday. He is a brave man and a wise man. He is the noble Lord, Lord Ashburton, known to many of us as John Baring. He is a distinguished banker who will undoubtedly bring a great deal of influence and interest to your Lordships' House.
The noble Lord, Lord Laing of Dunphail, made a speech which seems to me to be acceptable to everyone in the House who believes that mankind, in whatever cause he is operating, should do his duty. What he had to say on the subject of takeover bids relates closely to our experiences. I was a director of RTZ, a company 889 which was forced into a takeover bid to protect a company which did not want to be taken over. We had to go through the whole dreadful rigmarole of dawn raids, and in the end the employees did not like what we had done, although we did it in the interests of a company which was being taken over.
The principle involved is a sound and important one. We should study the experiences of our colleagues in other countries. In that respect, the matter is a source of sorrow, I know, to your Lordships. We have had discussions on ICI and other companies which were threatened by takeover bids regardless of the merit of the takeover. The noble Lord's speech represents his philosophy. I know his work. I have read it. As a director of personnel in a big company I have even had him talk to the staff. I wish he could talk to the staff of every company and, in particular, the boards of every company.
What the noble Lord said was valid and necessary in the interests of the development of the capitalist system so that it can be approved by everyone, which it cannot at the moment. I accept what he has to say about the capitalist system. It would always have been true had it been properly operated, but it never has been properly operated. That emerged from his speech.
The doctrine that the noble Lord has put forward is well contained in the books that he has written and which I have studied. I had members of my staff read them. Of course, the system he described is not the only system. I should like to refer to another system which is less generally applicable than the one described by the noble Lord. I mean the John Lewis Partnership. The week after I lost my seat in Parliament, I found myself standing behind a counter in John Barnes. I remember that I received a bonus of half a crown that day for opening a new account. I spent 10 extremely happy years with that remarkable institution. I do not know how many noble Lords are aware of the academic studies recently made. One or two show that the John Lewis Partnership, in competition with great companies like Marks & Spencer—and I do not wish to make any points on this—has an equal achievement, despite the constraints of the complications of its constitution and the partnership bonus, as it is called, the sharing of profits. In my judgment that is less important than the democratic rules that go with it. Less important than the fact that the profits are shared out is that it is done in a way that is constructive and contrary to short-termism. It is an effective system and those who believe in an idealistic approach to their job find that the partnership is a place in which they can be happy.
I must confess that during my latter years there I was in charge of a whole section of what was called the critical side—as opposed to the executive side—which was responsible for administering the partnership system and the rights and privileges of all the partners, as the employees were called. The company has a strange language which is sometimes the source of humour, including the partnership itself. It represents the principles that underlie John Spedan Lewis's dream. I believe that the company has a workable 890 system which could well be adopted by others who wish to go down that path. However, if no one does, all ought to study the principles of the noble Lord, Lord Laing, which he set out clearly in his speech. It is an example to us all in industry, management and everywhere. We all need to bear in mind these factors and I congratulate him on his speech.
§ 5.52 p.m.
§ Lord Ezra
My Lords, the debate which has been so effectively introduced by the noble Lord, Lord Laing of Dunphail, raises fundamental issues affecting industry and the economy. What he said has just been admirably supported and extended by the words of the noble Lord, Lord Shackleton.
In the limited time we have, each of us must choose one aspect of the wide-ranging subject. I choose that of the progressive change in the ownership of quoted companies from individual shareholders to institutional investors, to which the noble Lord, Lord Laing, referred and to the powers which this has put in the hands of the institutions.
It is fair to say that the institutions themselves have increasingly realised the importance of their new role in British industry. Last March the Association of British Insurers drew attention to the problem in a discussion paper entitled The Responsibilities of Institutional Shareholders. It contained nine principles of good practice. One was to encourage regular and systematic contact at senior executive level with the companies in which investments were held. Care would, of course, have to be taken to avoid imparting any price-sensitive or insider information. This is a highly desirable suggestion. From my own experience, I believe that it is already fairly widely practised. When I was at the coal board I had the great pleasure on one occasion, together with the director of the pensions fund, of visiting the noble Lord, Lord Laing, at his headquarters. We heard about the prospects of his company in which we were investors and we came away much encouraged.
Another principle proposed is that institutional investors should support boards by a positive use of voting rights, unless they have good and stated reasons for doing otherwise. This also is highly desirable. The voting rights of institutional shareholders are now so strong that they can amount to a shareholders' block vote, as the noble Lord said. It is essential that this power be used in a responsible manner.
It is further proposed that institutional investors should take a positive interest in the composition of boards of directors, with emphasis on the need for a core of non-executive directors with appropriate experience of independence.
There is support for the appointment of remuneration and audit committees, membership of which should largely be of non-executive directors. Both these proposals have wide support among many bodies and the issue of corporate governance is the subject of an inquiry currently being undertaken by a team headed by Sir Adrian Cadbury. The matter was recently discussed in the House in a debate introduced by the noble Lord, Lord Williams of Elvel.
891 Where the proposals about the role of institutional shareholders seem to me to fall short is in regard to the takeover situation. It is proposed in the document to which I refer that institutional investors should not commit themselves to a particular course of action until they have reviewed the best and most up-to-date information available. It is also emphasised that they have a fiduciary responsibility to those on whose behalf they are investing.
Both these points are entirely valid, but it can be asked whether they go far enough. In takeover situations, should not institutional investors have regard to the long-term strategy of the company which is the subject of a contested takeover, to the impact which such a takeover could have on those employed and to the wider national interest which might suffer as a result of some activities of the company concerned being discontinued or sold off?
In their document on the responsibilities of institutional investors, the Association of British Insurers indicates that:some considerations, such as the impact of a takeover on competition or on some other national interests, must be the direct concern of Government. In the absence of Government action, institutional shareholders cannot be expected to allow such issues to dictate their ultimate decision".This makes it very clear that institutional shareholders, in a bid situation or in any other situation affecting the future of a company in which they have invested, feel that their decisions must ultimately relate to where they consider the best interests of their members lie. If other wider interests are to be taken into account, then they must be indicated and the ways in which they can be observed laid down by government.
It seems to me that this is fundamental and it leads me strongly to support the noble Lord, Lord Laing, in the various proposals he made for changes in takeover policy and practice and in the other modifications which he would like to see introduced.
§ 5.57 p.m.
§ Lord Ashburton
My Lords, the trepidation anyone is bound to feel at speaking in your Lordships' House for the first time is compounded in my case by the fact to which the noble Lord, Lord Shackleton, drew attention—that I took the oath only yesterday afternoon. I am most grateful to him for the over-kind terms in which he referred to me. I am also most grateful to your Lordships' House for the opportunity of speaking today and would ask your Lordships' indulgence for the perhaps unseemly speed with which I have moved to the point of making my maiden speech.
I had no intention yesterday morning of making any such speech until I realised that the noble Lord, Lord Laing, was initiating the debate and that the fact that I have been a merchant banker for 40 years gave me relevant experience of a number of the subjects which will undoubtedly be covered. I have also had the pleasure of talking on numerous occasions to the noble Lord, Lord Laing, and other noble Lords about the subject and the concerns which he has so strongly put before the House.
892 I must say at once that I sympathise most strongly with much of what he said and certainly support continued debate on how changes of control of British companies should take place and on what extra measures may be appropriate to make the process more acceptable to all the stakeholders, the employees, the owners and the national interest. I cannot cover much of the fascinating field opened up to us by this debate but must concentrate more narrowly in the time available.
In the course of my time I have acted as adviser to companies that were aiming to acquire and companies that were being acquired, both willingly and unwillingly. I have also been on the boards of companies which were acquired, both willingly and unwillingly, and on the boards of other companies which were undertaking the acquisition. I know what a huge diversion of management time these processes involve, not to mention the personal career disruptions that follow takeovers and acquisitions at every level of the company.
There have been times when I have been tempted by the narrow balance of advantage being gained or by arguments that are particularly hard fought and narrowly balanced to feel that the whole business of merger and acquisition was too chancy and indeed on occasions too offensive to be justified. I know most corporate financial advisers have on occasion felt the same. Certainly many of us are concerned at the results of our efforts. But in the end it seems to me that we should continue to make it possible to change by this means the managements of companies who fall short of the standards they should be achieving. I believe that is what we are discussing; changing the management of companies. That is unfortunately not always done by boards of directors, who are naturally and inevitably themselves close to the business. An outside eye must be able to see things from a different point of view, and not every board of management accepts criticism readily. It may sound odd to noble Lords, but it is not always possible for institutional or private shareholders to work up a sufficient conviction to involve themselves in changing a management.
It is tempting indeed to look overseas to see how these things are ordered there. France, Germany and Japan have been mentioned by the noble Lord, Lord Laing. They certainly have different ways of ordering things, but I must say, if anything, they have been changing, however slightly, towards a more Anglo-American pattern. Tax considerations can have something to do with the practices of other countries, certainly in Italy for example. But what the noble Lord, Lord Laing, refers to as French chauvinism is a much wider phenomenon of French life than just the protection of French companies. I have doubts about how effectively we could transfer bits of that chauvinism to this country without much wider prior changes taking place across our society. That might be like expecting an avocado tree to flourish in northern Scotland.
Japan certainly is another case in point. While one can only admire what Japanese companies and Japanese-owned businesses in this country are achieving in fields where in the past we have manifestly 893 floundered, again I suggest from my experience that adopting parts of the Japanese system of ordering government/business relations would be difficult in our culture.
I now wish to make one further point. I feel that mergers between British companies, however achieved, are too often disappointing in their results. All the forward planning, be it operational, financial or economic, is not enough if the huge human problems which putting two businesses together entails are not properly addressed as the highest priority. Employees at every level, from the bottom to the top, deserve proper explanation, reassurance and involvement, always within the limits imposed by the fact that management must be allowed to manage and to judge what, if disclosed, might be commercially disadvantageous. I believe British management could do better in that respect. I have little experience overseas so I make no comparisons there.
The noble Lord, Lord Laing, has made suggestions which may help the position. As I have said, I would be against making it impossible for one company to acquire another, but I would certainly not be averse to the lowering of the shareholding limit above which a company would have to disclose its intentions. I would not be much concerned if there were a short-term rate of CGT although I wonder whether it makes sense to levy it at a level above that of income tax.
I would certainly not be concerned in principle if it was not possible to vote shares until they had been owned for 12 months. I also believe that individual managers should behave consistently. The phrase "Do as you would be done by" is a succinct way of putting it. Some managements who believe passionately that their company should be immune from takeovers change their tune when they are on the acquiring tack, or when they are wearing the hat of a trustee of their own pension fund considering what action should be taken in a takeover situation. We are all too aware of the widespread human frailty involved. Above all, however, I believe we should avoid calling in aid government fiat. May we in particular be spared Ministers taking unilateral decisions in this field.
§ 6.5 p.m.
§ Lord Nelson of Stafford
My Lords, it is a pleasure that falls to me on behalf of the whole House to congratulate the noble Lord, Lord Ashburton, on his excellent maiden speech. Your Lordships have heard him speak with great authority in this field. I am sure I express the wish of everyone when I say that I hope we shall hear him in this House on many occasions in the future.
I agree wholeheartedly with the Motion proposed by my noble friend Lord Laing. However, I shall not spend a great deal of the short time that is available to me in emphasising the importance of what he has said. I have just two points to make. Manufacturing industry will not survive in world markets unless it invests on an adequate scale—that means a scale commensurate with what is invested by our competitors—in research and development, test 894 equipment and new manufacturing plant. Additionally unless that is done on a stable and consistent basis, manufacturing industry will not retain or attract the able staff necessary to make such investment successful. Therefore the issue with which this debate is concerned is an extremely important one for us all. This is not a new problem. The dangers inherent in "short-termism" have been discussed now for quite a while. What is disappointing is that not much has been done about it as yet. I hope that other speakers, too, will use the short time available to them to consider what might be done to strengthen the position of manufacturing industry.
The situation in Germany, France and Japan has been referred to. I find that interesting, but I believe it is a wasted effort to believe we can adopt their systems. Our traditions are different to theirs and we must concentrate our minds on adapting our system to meet the needs of the problem. What action can we take? I do not believe we can expect the institutions to abdicate from their responsibility to do the best they can for their stake-holders, whether they be pensioners or investors. The noble Lord, Lord Ezra, touched on a number of points which can be addressed to ensure that institutions adapt their policies to ensure that as far as possible there is an adequate flow of funds back into industry.
I should perhaps add a further point to what has been said. Can we not adapt the tax laws a little to make it possible for the managers of institutions to realise it is in their interests to support long-term investment in industry and against their interests to adopt a short-term approach? Two methods have been suggested relating to the taxation of short-term and long-term investment profits. The matter of removing or adding the imposition of capital gains tax is another method of tackling the problem of steering investment in the direction in which it is needed.
We must encourage institutions to take a closer interest in the management and the business of the companies in which they have invested. Something has been done in that respect and that has been commented on. But my impression is that it is not nearly enough. One or two big institutions are talking to one or two big companies but across the board much more has still to be done. Perhaps we should consider how we can stimulate a closer working relationship between institutions and industry.
That leads me to industry itself. Industrial management must play its part in this matter. It must cultivate the institutions and make them more aware of what they are doing and why they are doing it. There is a constraint, which was touched upon by the noble Lord, Lord Ezra, namely the question of insider trading. However, it must be in the interests of all shareholders that companies are properly valued, and that particular issue may have been over-stressed. Company managements have to do a great deal more to cultivate their institutional shareholders. We should remind ourselves that, according to the CBI they control 68 per cent. of the shares of British quoted companies.
Management also has to do more to make its plans better known, possibly through company accounts 895 and the dissemination of more information. Here again one comes up against the issue of the commercial wisdom of disclosing to one's competitors exactly what one is doing. So there are constraints there as well, but a balance must be achieved between the two.
I should like to stress that we need action by a number of different parties. I hope that this debate will stimulate such action. In conclusion let me say that I should like to see a Department of Trade and Industry which is more proactive in furthering those points. The department should not necessarily take action itself but it should draw attention to weaknesses where they exist and stimulate change where such change is necessary.
§ 6.11 p.m.
Lord Bruce of Donington
My Lords, I, too, should like to congratulate the noble Lord, Lord Ashburton, on his maiden speech. I regret that the exigencies of time prevent me from enlarging upon that aspect of our affairs as I should wish. I should also like to support and congratulate the noble Lord, Lord Laing, who made a most thoughtful speech which will give all of us much on which to reflect during the coming weeks, months and even years. The debate he has initiated raises the most profound issues which would normally take much longer to discuss than the short time allowed within the context of this debate.
It cannot he denied that the interests of capital and capital generally have dominated industry since well before the beginning of this century. They dominated it in the Soviet Union, where there was the most extreme form of capitalism in which the state owned all the capital and, without any democratic control from below, succeeded in the course of years in ruining the Soviet economy. There were no democratic constraints. State capitalism as practised in the Soviet Union undoubtedly not only brought much destruction to the environment generally but ruined industry and caused great hardship to individuals.
The other form of capitalism, to which we in the West are accustomed, has, as the noble Lord, Lord Laing, said, brought considerable benefits in the intensification of the division of labour within industry and in its pursuit of profit. Undoubtedly it has brought about a state of affairs in which the standard of living in the western states has advanced at a much faster rate than elsewhere.
However, we should not forget that there are still defects within the capitalist system, to which the noble Lord so correctly referred. Those defects are expressed in current parlance by talk of a recession in which millions of people are unemployed in the free world, vast sections of the means of production are unused and human needs are clamant. Yet recession appears to be regarded as a disease like flu, a God-given or devil-given thing which suddenly afflicts people. The cause lies within the system itself.
We should not forget that although one form of capitalism has failed, our own form of capitalism has many more advantages, particularly in the role of consumer choice and the production of consumer goods. However, there is much which needs to be 896 corrected before it can even begin to serve the national interest to which the noble Lord referred in the Motion and when he asked for a better deal for stakeholders, among whom I assume he included the employees of the companies concerned who do the physical work of production.
The operation of market forces has not been able to produce that so far. It is up to us to make the changes —some of them philosophical changes in attitude—which have to be made. One of the first changes we have to make is to realise that we are all part of the same human family and that a factory or workshop is not merely a place from which labour can be shed, to use the current term, but is a place which is a social organism on its own in which people have to take into account the work which each of them does. Therefore we have to employ a degree of co-operation on all sides of industry—employees, stockholders and managers—very much on the lines of the German mitbestimmung and similar to that followed by Japanese enterprise. We have to turn our industries into organisms in which there is a oneness of purpose, where there is no sense of injustice between one and another and where the rewards are not outrageously disproportionate to the hours spent in work. That means a change of mind.
All of us have to realise that the national interest means more than the two words within which it is expressed. It means the re-establishment of a national ethos; it means the establishment of a social oneness within the factory or workshop; and a sense of community within the community as a whole. In short, instead of pursuing our activities merely for profit we should begin to do so in the pursuit of living.
§ 6.17 p.m.
§ Lord Grimond
My Lords, I should like to join in the congratulations which have been offered to the noble Lord, Lord Ashburton, and also to the mover of the Motion. If we have more such speeches as his I shall be converted to the view that the House of Lords ought to continue.
There is no doubt that the balance between labour and capital has tilted in favour of capital. It is essential not only to spread ownership but to involve workers in the running of and responsibility for their companies. They should feel that they employ management just as much as shareholders do.
One of the best ways of achieving that is through employee stock ownership plans, legislation for which exists both in America and in this country. In America 10,000 businesses operate such plans. Ten per cent. of American workers outside agriculture are members of such plans. That is a remarkable statistic when one bears in mind that only 15 per cent. of such workers belong to trade unions. The numbers in such plans are growing steadily.
Why is it that such plans have been almost a total failure here? The answer is twofold. First, there is the intolerable complication and expense with which any innovation in this country is almost inevitably surrounded. Secondly, we attempt apparently to block 897 every loophole in taxation which might be exploited by some rogue. The end result is that the rogues escape and the honest men are driven to exasperation.
There are two serious objections to the form of ESOP which the present Government rightly introduced. The first is that in this country a majority of the trustees of an ESOP must be elected by the workers themselves. Now, that may be desirable and I am in favour of it in general, but it should not be a sine qua non. Furthermore, it is neither favoured nor wanted by the trade unions. The second is the tax objection. If a shareholder sells his shares on the formation of an ESOP he will receive certain tax advantages. However, he may forfeit those advantages in punitive terms if the company does not "get out", as it is called, the shares within seven years. People have proved to be extremely unwilling to undergo such a risk when they cannot be certain what the next seven years may hold for a company.
The result is that there are very few ESOPs in this country while the scheme is forging ahead in America. It appears to be one of the best ways of achieving what the noble Lord, Lord Laing, wishes to achieve. There are many other ways but during the short time available I wish to concentrate on this issue. Nor have I time to explain an ESOP in detail. The scheme has been on the statute book for some time; it is essentially a plan for ownership by the employees themselves.
I was chairman of an organisation called Job Ownership which exists to promote ownership by the workers in industry. The organisation raised the points I have made with the Chancellor of the Exchequer and I am grateful that we have an opportunity this evening to raise them again at a most strategic time in the financial year. Although I understand that the Minister cannot what is in this House's Prayers called "pre-vent" the Chancellor of the Exchequer and tell your Lordships what the Budget contains, I hope that he will represent to the Chancellor that there are serious drawbacks to a scheme that has worked extremely well in America and which the Government have supported in this country. I understand that the Minister will not be able to tell the House that he will do something about that, but I hope he will at least make favourable signs that my comments will be taken into account.
§ 6.22 p.m.
§ Lord Benson
My Lords, I believe that there are five categories of stakeholder in the industrial organisations of this country. All are of equal importance. They are the management, the workforce, the creditors and in particular the banks, the customers and the shareholders. Therefore, the task before us is to consider whether each of those stakeholders is making its best contribution to the country's industry. I do not believe that they are and perhaps I may give some examples.
In the past five years two of those stakeholders have not, in my view, discharged their responsibilities satisfactorily. They are management and the banks. Management has failed because it raised enormous loans at high rates of interest which were out of 898 proportion to the capital bases of their companies. The result is that debt equity ratios are now completely out of hand. The situation has been exacerbated by the failure to spend sufficient on research and development and the failure to retain sufficient profits to finance the installation of the modern technologies that are being developed in every field of business activity.
The banks have failed to live up to their responsibilities because they have lent imprudently without considering or monitoring the viability of their customers' businesses or the soundness of the management. I do not have to justify these views. The financial columns of every newspaper record collapses, fraud, bankruptcies, liquidations, massive redundancies, the loss of markets and the massive provisions required by the banks and finance houses for bad and doubtful debts.
Perhaps I may give a second example. I do not believe that the institutional shareholders and the fund managers have discharged their responsibilities adequately. They are caught in a conflict of interest. One of their objectives is to maximise the dividends paid on their investments and the capital value of their holdings. They welcome takeover bids because takeover bids automatically have that result. The consequence is that shares are now regarded as counters to be traded in the bazaar rather than as the bedrock of our industrial prosperity. That attitude of mind has done and can do irreparable damage to the long-term interests of the companies in which the institutions invest.
Therefore, the task that faces us is to persuade individual stakeholders to subordinate their own interests in favour of the national interests and of the other stakeholders. I believe that can be done only by lifting commerce and industry out of the maelstrom of day to day political controversy and formulating a national industrial policy. That would identify the responsibility of the stakeholders and their collective responsibility to the nation and to each other. It would give us the leadership that we have lacked for so long. It would give us a firm foundation on which to build for the future and to stem the decline in our industrial output that has continued for so long.
During the 66 years that I have been in the City there has never to my knowledge been a national industrial policy except during the five years from 1940 to 1945. During that time our achievements in the industrial field were little short of miraculous. I realise that a chorus of strident voices will be ready to denigrate the proposal that I have put forward. However, I wish to remind the House that 45 short years ago we vanquished our then enemies, Germany and Japan, having inflicting untold damage. During the past 40 years those two nations have restored their economies on the basis of sound industrial policies, with the result that both now dominate the industrial markets of the world. By comparison our achievements are second rate and they will remain second rate unless we take some action to stop that. What we need above all is the discipline and the leadership of a national industrial policy instead of the absence of such a policy that we have endured for so long.
§ 6.27 p.m.
§ Lord Boardman
My Lords, I too congratulate the noble Lord, Lord Ashburton, on his maiden speech. I have had the privilege of being associated with the noble Lord on various occasions in the City. I know of his distinction there and of the great work that he has done for charitable causes. We are fortunate to have him in this House and I hope that we shall hear from him often.
I also thank my noble friend Lord Laing for introducing the debate. It is a most important subject. Although we cannot cover it properly in the short time that we have available perhaps we may see how we can best do so. I am not sure that the position is as one sided as my noble friend suggested. There have been more British takeovers of American companies than has been the reverse. That has been true too of other parts of the world, although I accept that in Europe the position is less happy. The restrictions of government and companies in countries such as France and Germany make a hostile takeover virtually impossible.
Nor am I sure that I can accept entirely my noble friend's criticism of institutional shareholders. I believe that his criticism is too severe. My experience has been that institutional shareholders, if given the facts and if there is competent management, will show great loyalty to the companies in which they have invested. There has been a change of attitude in recent years. Perhaps Pilkingtons marked the turning point a year or two ago. That situation showed how institutional shareholders will rally round a company which has invested heavily in research and has good management. I accept, though, that a company which has spent heavily on R&D and depleted its distributable profits may be pounced upon unless it is able to convince its institutional shareholders that what it has done is right, explain why it has done it, and make clear that shareholders can expect benefits to come from it.
I believe that we can improve the procedures to give an element of greater protection from short-term speculation. Various suggestions have been made by the Select Committee chaired by my noble friend Lord Caldecote, the Select Committee in another place, the Takeover Panel and others. I am sure that those should be considered carefully. However, at the end of the day—I agree with my noble friend Lord Nelson —the main responsibility must be upon the directors and management to justify a continuation of their stewardship. It is their responsibility. They must have the record to show and must ensure that that responsibility is recognised.
I wish briefly to comment on an aspect of corporate governance which has not so far been raised but is within the Motion. It is a matter that disturbs me. Indeed, I could add it to the five factors listed by the noble Lord, Lord Benson, since it refers to the role of accountants who act as auditors. The noble Lord was a distinguished leading member of that profession. I recognise that the role of auditors is clearly defined by statute. I define that role as that of watchdog for the shareholders, and indirectly for the creditors, over the 900 correct factual presentation of the financial state of the company. An auditor is in a semi-adversarial position against the directors and management.
The shareholders appoint the auditors. The shareholders have the power to fix their fees though in fact they normally delegate that power to the directors. The auditors should be responsible to the shareholders. However, in many, if not most, cases the same firm which is employed as auditor is also employed by the company for a range of accountancy, consultancy and tax advice quite outside its role as auditor. The fees agreed by the directors are often greater than the audit fees. The same firm discharges two roles; first, it questions and sometimes challenges management; and, secondly, it is employed by management to advise and help.
I have no doubt that the vast majority of accountants carry out that dual role with complete integrity and do not allow the one role to interfere with the other. However, that may not always be so. We should consider the point carefully. It may be that accountants who act as auditors for a company should not be allowed to carry out any other paid task for that company. One should perhaps consider a power for auditors to have more snap inspections of the firm that they audit instead of waiting for the end of year results when they audit only annually. A lot can go wrong, as we know from recent cases, during the course of a year. The auditors should be responsible direct to an audit committee of the board. I refer of course to quoted companies.
These matters deserve and require deeper examination than I am permitted to carry out in the short time available today, but I hope that I have indicated the line of monitoring that I believe we should consider for better corporate management.
§ 6.34 p.m.
§ Lord Pennock
, My Lords, perhaps I too may pay tribute to the noble Lord, Lord Ashburton, on the occasion of his maiden speech. One could not help but admire his courage and clarity. He put forward views which will not be in accord with those of many colleagues in the House today but he has presented his views with fairness and complete comprehensibility.
I recall meeting the noble Lord, Lord Laing, for the first time 15 years ago on an occasion, which he may well have forgotten; it was to discuss an issue seemingly far removed from today's discussion. The subject on the table was the Bullock Committee's proposal to appoint worker directors with the specific responsibility of representing the interests of the shop floor. We were a band of industrialists. I assure noble Lords that we were not dyed-in-the-wool reactionaries. We were all enthusiastic practitioners of what was then called joint consultation. We were all seeking to increase the involvement of shop floor employees in understanding our businesses and influencing the decisions that affected them. We were non-political. I recall that the noble Lord, Lord Shackleton, was also a member of the group.
Our conclusion at the end of our discussion bore an uncanny similarity to the issue that we discuss today. We maintained that there must be a balance between 901 the interests and aspirations of all the stakeholders in a company. I agree with the noble Lord, Lord Boardman. That balance is a director's responsibility. We defined the stakeholders as the investors and creditors, the customers, the employees (management and shop floor), the community (local, where the business is situated), and the community at large (which is the nation). If the demands of a group of shareholders upset that balance then the health and future of that company will be in danger and the company will find itself non-existent.
In the 1970s there was the great danger of dominance of shop floor interest, industrial unrest, stoppages and strikes, and inflated wage demands without corresponding increases in productivity and competitiveness. Those were issues which kept company chairmen awake at nights. Today, on the one hand, it is the fear of a share price which can be the result of financial manipulation and, on the other hand, the demand of a favourable short-term bottom line at the expense of the longer term health of the company, or even the effect of political happenings in countries far removed from the place of business. Those have become the burning questions of the late 1980s and early 1990s.
I cite a few hard facts on the perils of short-termism. The first relates to a cut back in capital investment to shore up the bottom line. It is already happening. In the 1980s our capital investment improved significantly. I have many figures available. We increased to an average figure per person in manufacturing industry of about £2,000 per annum. That was a considerable increase on the 1970s. The figure was still behind those of the French and the Germans. As noble Lords can imagine, it was well behind the Japanese who increased their capital investment at a rate of 9.5 per cent. per annum and achieved a figure per person in manufacturing industry of about £5,500 per annum. In 1991 the forecast by the Chancellor in his Autumn Statement is that there is a decline in investment of 9 per cent. That spells danger.
I refer to the effect on research and training of short-termism. The CBI informs me that training is standing up remarkably well. On research, some noble Lords may remember that I described in a previous debate how the pharmaceutical and agrochemical businesses in ICI—now its major profit earners by some hundreds of millions of pounds per annum—were researched at a very high expense for 10 years without earning a penny profit and demanded huge research in the long term at the expense of short-term profits. There is the danger of paying high dividends to keep up the share price. Although we did better than the 1970s, the CBI calculates that in the 1980s our productivity went up 5 per cent. per annum, and our profitability also went up 5 per cent. per annum. Our dividends went up 15 per cent. per annum. An increased dividend at the expense of investment cannot continue to be the case.
The solutions? We have heard many today. I believe that maybe we should look into the question of more long-term finance, more long-term loans, with 902 less dependence upon the stock market for our equity and capital. There are 500 companies on the German stock exchange; we have 2,000. Maybe we should encourage our banks to invest in companies and not just to lend them money and to look all the time at interest rates; perhaps we should encourage them to become involved in those companies. Again, I am reliably informed that in Germany 10 per cent. of all what we would call non-executive directors—that is, members of supervisory boards—are bankers. The bankers that I have met recently on the German scene are businessmen who know what they are talking about.
Finally, as a number of us have said, how unfortunate it is and how frightening that we have 70 per cent. of the equity market, of our share investment, controlled by insurance companies and pension funds. About 100 people make these fateful decisions. It is also a fact that something like 70 per cent. of our manufacturing production is completed by not more than 300 companies. These are small numbers for a national problem.
I am not sure that I could rise yet to the notion of the noble Lord, Lord Benson, of a national policy, but I should have thought that within these numbers there could be a change of attitude. We changed attitudes in the 1980s, moving away from those of the 1970s, in a remarkable way. I believe that we shall need to change attitudes in the 1990s and move away from the weaknesses of the 1980s, with its insistence not on profit but on short-term profit and not long-term profit as well, which is equally important.
§ 6.42 p.m.
§ Baroness O'Cathain
My Lords, it is good to have a debate on industry, and wonderful to have the contribution of my noble friend Lord Ashburton in his splendid maiden speech. I wonder whether I am alone among noble Lords who of late have felt submerged by local government Bills and by further and higher education? Too little time is spent considering the position of the wealth creators. That is why I welcome this debate today, particularly as it is a debate instigated by the noble Lord, Lord Laing.
I have been one of the noble Lord's admirers for over 20 years. I have always regarded him as a humaniser of industry, who has led the way on developments which have resulted in industry being a better place in which to work and a much more attractive proposition for our young people in their career choice. As he has always been in advance of his time, it was no surprise to see that he had put down a Motion that has its eyes firmly set on the 21st century.
The recent and current world recession has caused us to be pessimistic—too pessimistic—about our industrial sector, but I believe that we can be optimistic about the future. Industry used not to be attractive to the best brains, but that has changed. Industry has been recruiting many more graduates, but it has also become more attractive to school leavers. Twenty years or so ago school leavers would never have had any chance of ever considering that senior management or indeed board membership was within their sights. Now it is. Why?—because of the 903 universal commitment to youth training, management training and, importantly, continuous training throughout one's career. This commitment has been the result of major government initiatives, the most recent of them being those of the Department of Employment creating the TECs.
Industry now is a more democratic place in which to work. I have spent a little time making these points because it is important to realise the distance we have travelled in terms of making industry a more attractive place for the young, and the greatest need of industry in the 21st century will be a highly-skilled, flexible, enthusiastic labour force. This is one way of attracting and keeping the commitment of the providers of capital.
Of course there should be an equitable balance in industry between the interests of capital and of all other stakeholders, and of course the term "other stakeholders" encompasses employees. We have been told that "the City" has too much power over industry and that its outlook is too short term. Already in a debate in your Lordships' House I have stated that I believe that short-termism is not the problem that others perceive. I repeat, the banks have sustained the United Kingdom industry over long and difficult periods, including the 1960s and 1970s when the economy was beset by stop-go policies. Despite what my noble friend Lord Benson says, many banks are in the forefront of trying to save companies. All have departments with descriptive but unfortunate titles, such as intensive care units, which have been set up to take under their wings companies in financial difficulties with a view to nursing them back to health.
There are many senior bankers beavering away giving advice to these companies that have over-extended themselves, set over-ambitious targets, paid less attention to management controls and marketing than they should have done, and whose managements did not have enough expertise to see that a slowdown was likely. This is remedial action, but positive action also rates high in the banks' strategy. For instance, the Midland Bank set up some 350 enterprise centres in March 1990 with the aim of counselling businesses. To date some 300 of the managers of those enterprise centres have been sent on courses in the Manchester Business School where they have studied how best to assist business. That really does not match up to the conventional image of a non-caring banking system.
However, that is not to say that things are not tough. Of course they are. But I believe that there is truth in the saying that from adversity comes strength. Industry is much leaner, fitter and alert; it is more aware of the competition than ever before. Most employees in industry now identify with the strategy of their company, with the products of their company, as barriers to communication have been steadily eroded. The whole industrial atmosphere is more open.
Employees in industry—I resist calling them workers; everybody should be a worker from the chairman to the postboy—have a much greater stake in their company than is apparent. Government 904 measures have encouraged this through the development of schemes such as the savings-related share options and PEPs linked with company shares, encouraging staff to take up a long-term shareholding in their own company. The creation of a much greater shareholder base throughout the country as a whole, partly as a result of privatisation, has made more individuals aware of the opportunities to invest in industry. I read recently that over 25 per cent. of the adult population now owns shares.
The institutional investors cannot disregard, and do not disregard, the needs of their suppliers of finance; namely, the pension funds of business. But perhaps there is a requirement for greater vigilance by trustees on behalf of their members. The noble Lord, Lord Laing, makes a persuasive case. The "interests of capital" mentioned in the Motion are also the interests of employees. Corporate pension schemes have a big stake in industry, and more and more employees realise that their real interests lie in a strong industrial base.
The government are frequently accused of not doing enough for industry, but an examination of basic statistics suggests that if this is so, industry is still managing to score some notable successes. Manufacturing productivity growth in the 1980s has been faster than in any other major industrialised nation. In the decade 1970 to 1980 Britain was sixth in the league table for business investment growth in the G7 countries, and in the following decade second. Much has been said today about the lack of investment, but the figures do not bear it out. Above all, the Government have created a climate of low inflation, which makes industry's planning task so much easier.
The suggestions put forward in the debate today are worthy of further consideration. I am sure that they will receive it. It would be nice if the message that went forth from here to industry was, "We appreciate your problems, we appreciate your worth, and we hope that at worst we do nothing to hamper your progress and at best we can encourage you to increase your competitiveness". The future of this country relies to a large extent on having a successful, thriving industrial base. Once more may I say how grateful I am to the noble Lord, Lord Laing, for instigating yet another successful initiative in calling for this debate.
§ 6.49 p.m.
§ Viscount Caldecote
My Lords, I fully agree with all that my noble friend Lord Laing said in his opening speech and I congratulate him on it. As he said, there is no doubt that a capitalist economy as we understand it provides the best basis for wealth creation and meeting the needs of the community as a whole but it is not perfect. Therefore, we are most grateful to my noble friend for giving us the opportunity to take a constructively critical look at modern capitalism, which originated with the establishment of the limited company concept in 1855. That enabled the owners of a company to invest any sums they liked knowing that that was the limit of their risk. Therefore, enterprise and risk-taking were 905 encouraged, creating added value and new resources for the community and wealth for the owners if the company flourished.
In that context, the principle later enunciated by a chairman of General Motors in the United States was that "What is good for General Motors is good for America" seemed to make sound sense. It clearly implied that if the shareholders—the owners of a company—prospered, there was no need to look further for any other objective because that ipso facto benefited the community at large.
In today's circumstances I believe that we need to cast a critical eye over those principles to see whether they are as relevant and serve us as well today as they did in the past. However, we must beware of generalising, for the situation of a small, newly formed limited company struggling for survival, owned by a few shareholders closely connected with the founder, is very different from that of a great multinational plc, mainly owned by financial institutions, making profits of hundreds of millions of pounds.
In the small company, maximising shareholders' value is vital to survival, and in virtually every case the survival of that kind of company is in the interests of the community. Jobs are created, a new service or product is provided and there are the prospects that it may grow to be one of the great companies of the future. Therefore, the interests of the shareholders are the same as the interests of the community.
However, the situation of the larger, established company trading well is rather different. It has greater freedom of manoeuvre to look, as I believe it should look, beyond the bottom line and shareholders' value to the wider interests of all the stakeholders referred to by my noble friend. As he made clear, they include the community within which the company operates.
In my view the primary objective of such companies should be to give the best value for money to their customers and, most of all, to expand their business to make the maximum contribution to the prosperity and the interests of the community. Of course those objectives can be obtained only if the company earns profits on a scale adequate to generate and attract the funds needed for continuing investment, thereby ensuring the survival and growth of the company. In my view those should be regarded as a means to an end and not the end objective itself.
Some companies—and clearly United Biscuits is one of them —already work along those lines but too many do not. Therefore, they fail to meet their full responsibilities to the community. That kind of approach to business is in danger of bringing capitalism into disrepute and creating a climate in which the imposition of excessive controls and disincentives will be demanded in our democracy. That will be to the long-term detriment of the community for, as the late Lord Bramwell said in the 1850s in the discussions on the formation of limited companies:If ever there was a rule established by reason, authority and experience, it is that the interest of a community is best consulted by leaving to its members, as far as possible, the unrestricted and unfettered exercise of their own talent and industry".906 That is as true today as it was then. However, I endorse what my noble friend said; namely, that the greater the freedom given, the greater the need for responsibility in exercising it. If capitalism is to survive, with its unrivalled potential for adding value for the benefit of the community, I believe most strongly that its objectives must be redefined along the lines which I have suggested.
§ 6.54 p.m.
§ Lord Sharp of Grimsdyke
My Lords, the Motion of my noble friend Lord Laing is couched in elegant terms with its reference to the need for equitable balance in the management of capital. However, the issue can be simply stated. Is the shareholder supremacy and corporate governance currently enshrined under UK company law, both politically and economically sustainable? That is a difficult question but it is important and timely that it is aired and debated. It is in that seminal sense that I make my now truncated contribution to the debate.
My noble friend Lord Laing argued persuasively that directors of boards of joint stock companies have a duty to constituencies other than exclusively to their shareholders. That is a very seductive argument. Like motherhood, it is difficult to resist the emotional appeal. However, the reality is that any successful company cannot really survive or prosper without well-trained and motivated employees, without satisfying customers on value and price and without due regard to the economic well being and health and safety of the community in which it operates. Inevitably the shareholder comes at the end of the queue of the various interests, but it becomes dangerous legally to elevate those other interests over the interests of shareholders if the full benefits of the joint stock company structure are to be maintained.
The introduction and development of the joint stock company has conferred massive benefits to society, as the noble Lord, Lord Bruce, commented and its contribution to economic growth and a higher standard of living for all who live in a free enterprise economy no longer needs to be justified against the now discredited alternative of a centrally managed economy with the state making all economic and production decisions. However, that does not mean that we should not be sensitive to the need to effect improvements.
Under current company law, the supremacy of the shareholders is paramount and I would not wish to see that legally weakened because in my view it is essential not to diffuse the accountability of the board of directors. However, we need to examine whether the shareholders' rights need to be strengthened, particularly in the context of the dominant position of institutions which control so much of the equity of the joint stock companies.
In 1963 private shareholders held 59 per cent. of the quoted equity of British industry and commerce. Today that figure has declined to 12 per cent. That means that a handful of fund management groups, by virtue of the size of their shareholding, now control the destiny of a large segment of our quoted companies. Even greater concentration of ownership 907 is inevitable if only because of pre-emption rights firmly exercised by the institutions. I hope that the authorities will review that practice in the context of seeking wider share ownership. It is a matter of some general importance, particularly to those companies wishing to raise capital from overseas investors as well as seeking to widen ownership of their shares in this country.
I agree entirely with the view expressed by my noble friend Lord Laing that fund managers, for all their protestations, are inevitably influenced by short-term considerations. To some extent, trustees of company pension funds have only themselves to blame when they hand over to institutions the management of their pension fund and then proceed to measure their performance by quarterly evaluations. It is open to the trustees to offer contracts to institutions based on yearly rather than quarterly evaluations and they could also reserve the right to be consulted on disposal of shares in any company faced with a hostile bid.
There has been much discussion on the need to establish a level playing field in takeovers. My noble friend Lord Laing commented on the chauvinist attitude of the French. A level playing field is not essential when we play games because any inequalities or adverse conditions tend to be evened out through the equitable arrangement of changing sides at half time. It is difficult to envisage using that expedient in competition takeover policy. However, reliance on the competition criterion alone is not enough in an imperfect world with built-in restraints and obstacles. In that context I have every sympathy with the Secretary of State for Trade and Industry who wished to prevent nationalisation by the back door by resisting the opportunism of French state-owned firms which wished to acquire companies in the United Kingdom by hostile bids.
State-owned companies have a built-in advantage in that they can achieve their target without being over-concerned with the discipline of cost and financial implications, as long as they are underwritten by the French Treasury, even if they incur losses. To discriminate against such French concerns merely because they were state-owned or controlled has been ruled ultra vires, yet I think the Secretary of State was fundamentally correct.
I believe that some further harmonisation in competition and takeover procedure and policy is called for, and I look to the Secretary of State for Trade and Industry to initiate discussions on those issues with his counterparts in the Community and with Sir Leon Brittan in his pivotal role as Competition Commissioner. Central to those discussions will be the consideration of the public interest, including implications of a takeover on employment, research and development, regional policy and not least competitiveness.
I submit also that, notwithstanding the overall jurisdiction of the Treaty of Rome and the endeavours of the Commission to seek even-handed treatment of companies across frontiers, our own Secretary of State for Trade and Industry should persist in demanding full reciprocal rights when considering applications by companies of foreign countries, including Community 908 countries, if they are making hostile bids for UK companies. The Secretary of State for Trade and Industry has already introduced that reciprocity principle in considering applications by foreign companies who wish to take advantage of the liberalisation of telecommunications services in this country. I welcome that initiative and ask that the same principle be applied to foreign, hostile takeovers.
Nothing that I have said should diminish the importance of reinforcing the accountability of directors to their shareholders, to improve the flow of information and to improve the efficiency of capital by restructuring of companies and industries. As a final comment, perhaps I may quote from Jonathan Charkham, the adviser to the Bank of England. He said,Is there just the slightest possibility that our market system, so excellent when viewed in isolation, may be put at a disadvantage in international competition by those who have superior linkages and lines of accountability within it, and a greater sense of patience".
§ 7.2 p.m.
§ Lord Skidelsky
My Lords, perhaps I may add my congratulations to those already offered on the most interesting maiden speech of the noble Lord, Lord Ashburton. It is a good time to hold this debate because the battle between capitalism and a certain kind of socialism is over. Hardly anyone believes in state ownership of the economy or central planning of an economy anywhere in the world. It is natural to say that if capitalism is in charge it should be socially responsible.
There are many ways of talking about that. We in the SDP used to talk, and still talk, about the social market economy; but stakeholding is another expression when talking of social responsibility. The basic idea is that a company should feel responsible not only to its shareholders but to a variety of other interests and generally to the wider community. Noble Lords spoke of consumers, employees and the Government; they spoke of the national interest, though I fail to see how the national interest can possibly be a stakeholder in any ordinary meaning of the term.
As the noble Lord, Lord Sharp of Grimsdyke, said, it is a seductive thought. But it is not an entirely convincing one. One is in danger of a confusion of language leading to a confusion of ideas. What does "stakeholder" mean? In the simplest way and the way I understand it it means "owner". Customers are not owners of companies except where they may be part of consumer co-operatives. Similarly, employees are not stakeholders unless they own the company or shares in it. What about governments? Governments can be stakeholders in companies if they own part of the equity in them. But is that the road down which noble Lords want to go? It certainly has not been a proposition put forward this evening. Unless we are clear about the position, there is a danger that we shall go back down the road to corporatism where responsibilities are not clear and the division between the public and the private becomes blurred.
Tonight we have heard the voice of big business. It is a humane voice. It is a plausible voice. We did not 909 hear the voice of small businesses. There has not been one mention of markets, as though the whole revolution of the 1980s had not happened. We must also remind ourselves that the voice of big business is the voice of managerial autonomy. If one sets oneself the task of balancing between the different stakeholders, that is an argument which amounts to a demand for no accountability whatever to anyone.
Having said that, I do not dispute for a moment that businesses should be socially responsible and have strong commitments to their employees. After all, that is a matter of self-interest. The evidence is overwhelming that the better employees are treated or looked after, the better they perform and the better the results of the companies. One point which was hardly mentioned this evening but which is important concerns investment. Noble Lords mentioned investments, but investment in people is the most urgent matter facing our industry at the moment. Investment in training is good business. There is no guarantee that a worker trained at the employer's expense will stay in that company, but a company which invests in its workforce is more likely to retain their loyalty than a company which treats labour as a commodity.
Further, employees can be made into stakeholders in the technical sense of the word; they can be made shareholders. I support that. There should be a great deal more employee share ownership. There are strong arguments for it both in terms of attitudes to the company and something which has not been mentioned—that the wider employee share ownership is, the more it tends to stabilise employment by countering inflationary wage demands.
Finally, there is a version of stakeholding of which I wholeheartedly approve. It is summed up in the slogans of a property or share-owning democracy. It is the concept that the whole population has a stake in the wealth of the country and that the wealth-creating process is extremely important. A great deal more can be done to deepen share ownership from the point it reached in the 1980s by developing a secondary market in shares. We need to increase the quality and supply of advice to potential shareholders. We need to simplify communication between companies and potential shareholders. Trying to read a company's annual report is even more painful than trying to read the Local Government Bill passing through the House at the moment.
I believe we need also to break the registrar's oligopoly over share registration. Why cannot banks and building societies establish personal shareholding accounts, where individual shareholdings come with the regular statements? Those are all forms of stakeholding of which I wholeheartedly approve. Stakeholding in that sense and the other senses I have described is set to become one of the big ideas of the 1990s. I am grateful to the noble Lord, Lord Laing, for introducing the debate.
§ 7.9 p.m.
§ Viscount Brentford
My Lords, I too should like to thank my noble friend Lord Laing of Dunphail for introducing the debate. It is timely and I endorse most 910 of what he said. I believe those points are worth considering. I also congratulate the noble Lord, Lord Ashburton, on his admirable maiden speech and look forward to hearing him on these and no doubt other topics in the long-term future.
I wish to comment on two points which have often been mentioned in this debate. I also wish to touch on attitudes and communication which are tremendously important today. Management must manage. I repeat the point which has already been made. Management needs checks on it. One of the very important checks is in the form of external directors on the board. They can play a very significant role in good management. They can look at matters objectively in ways which those who are employed full-time in management of a company may be unable to do. It is also good to see annual general meetings of shareholders being used, albeit in a way that can often be crushed. But useful things are coming out from questions which are put at annual meetings. I hope to see that procedure being used all the more.
The first attitude of management is that it bears responsibility to manage. It also has an attitude that is relevant to all the stakeholders who have been mentioned, including the local community, where that is relevant. I believe that it was my noble friend Lord Boardman who commented on Pilkington, which is a company which has a great history of looking after the local community. The more that that can happen, the more beneficial it will be. There is also the attitude towards the nation and the role of particularly substantial companies, of which there may be only one or two in the country. They have a responsibility to the nation.
A great deal of what we are talking about shows the significance of relationships in the management of companies. It is obviously crucially important for management to have good relationships with other employees and also with all the stakeholders. That human aspect will be all the more crucially important in future. There is the attitude towards the priorities that should govern the future policies of a company. I look forward to seeing an attitude which moves away from short-term gains towards a 10-year investment policy in such aspects as technology, research and development.
I now turn to communication. That is a jargon word for which I apologise. It covers in one word what several of your Lordships have said. Perhaps I may illustrate one point of good communication which is now compulsory in the directors' report—that is to say, the amount that is given by the company to charities during the year. Since I put down my name to take part in this debate I have looked at quite a number of annual reports which have passed through my hands in the past week. I have seen the great range of the percentage of profit before tax which is given to charities. Sometimes the sum is minute and sometimes it is as much as 1 per cent. of the profit. That is a very healthy sign of good communication today. I would like that to be extended. I would also like companies which do not give much to charity, to do so because that would be good for their image. There is a great need for that today.
911 I also wish to follow the noble Lord, Lord Skidelsky, concerning training. I do not support the trade union recommendations which I have seen to make it legally binding for every employee to have five days' training per annum. However, it is often appropriate for companies to give five days' training per annum to those employees who will benefit from it. I should like a statement to be added to the directors' report about how much training is being given, although sometimes that is included. The more information that is disseminated on the subject, the better it will be for the nation.
There is another point I wish to make concerning communication, which is improving today. I refer to publicity for a company's philosophy, strategy and motives in what it is aiming to do. There is plenty of scope for that, which is good. I hope that, by and large, companies will keep improving communication with their shareholders and the general public as to what they are doing.
§ 7.15 p.m.
§ Lord Mottistone
My Lords, I congratulate the noble Lord, Lord Ashburton, on a first-class maiden speech, particularly on having the courage to speak on a subject of this kind so quickly, and also on making an important contribution to the balance of the debate as a whole.
I also wish to congratulate my noble friend Lord Laing on introducing a subject about which he feels very strongly and at the very earliest time that he reasonably could. Being a Scotsman, he is likely to be persistent and in successive Parliaments achieve his aim. One of my Scottish uncles, the third Viscount Elibank, took many years of persuasion in this House and behind the scenes to cause the Government to introduce pictorial postage stamps which are now so popular but which were initially strongly resisted both by the government and the Post Office. Perhaps my noble friend will be equally successful in due course in his efforts to have a more even balance of power in the control of public companies than exists today.
My noble friend has explained clearly how the balance of power has shifted from being excessively in the hands of management in the 1930s and excessively in the hands of trade unions in the 1960s and 1970s to being now excessively in the hands of a few institutional shareholders. I agree strongly with my noble friend Lord Laing that the proper control of any activity, including businesses, can be efficiently exercised only if as far as possible it is evenly balanced between the major forces providing that control. For the long-term success of a company, if there is to be greater power in any one of the three major sources of power—management, labour or capital—it must surely be in the hands of the source which has the interests of that success as its only concern. I refer to the management and its workforce.
Studying the problems of the 1970s and being a manager at that time led me to the conclusion that the particular weakness of the great power of the trade union leaders was that they had a general interest in exercising that power, as they saw it, for the general good and not enough interest in the success of any of 912 the particular enterprises in which they had representation. I believe that my noble friend Lord Laing is telling us that the institutional shareholders who now exercise excessive power also believe that they are acting for the general good but they too do not have enough interest in the long-term success of any of the particular enterprises in which they have shares.
The problem is how best to limit the power of providing capital so that the success of enterprises is maximised while, as other noble Lords have said, not unduly restricting the proper protection of the shareholders. My noble friend directs our attention to the practices of the French, the Germans and the Japanese. I am sure that he is right to do so. He also made useful suggestions as to what can be done by companies to protect themselves and by government.
I hope that my noble friend the Minister and his colleagues will give serious consideration to how these proposals might be implemented. In addition, the Government might well start by reading an article in the Economist of 18th January, page 94, entitled "GATT's next mountain". We must listen to what my noble friend Lord Laing has had to say.
§ 7.19 p.m.
§ Lord Wade of Chorlton
My Lords, I am well aware of the views of my noble friend Lord Laing, which come from being ex-chairman and managing director of one of our greatest companies. I speak as one who has been involved only in very small companies where the manager has invariably been the owner. It is in that context that I should like to give my views on the impact of capital in that particular area.
I think that we would all agree very strongly with the noble Lord, Lord Laing, the directors and all the stakeholders that there is a paramount need to have a genuine and common interest on all fronts. However, in small businesses—and I see no reason why it should not be so in large businesses—it is the manager who brings about that point of view. The noble Lord, Lord Ashburton, who gave such a splendid maiden speech, referred specifically to the quality of management in this respect, as did the noble Lord, Lord Benson. Although we are aware of the financial difficulties of large companies—and we are all very much aware of that in smaller businesses—I think that it must also be accepted that many managements of large companies have regarded their shareholders as a source of money to be plundered.
My noble friend Lord Laing referred to the founder of Nabisco. I do not know whether any noble Lords have read Barbarians at the Gate in which it is shown what the successors to that company tried to do to their shareholders, without having any interest at all in the welfare of the shareholders. Some of the shareholders might have been—and most likely were —institutions. In fact, vast numbers of them were small independent shareholders. It is my view that in many large companies recently management has forgotten the owners of the business. In small businesses we do not forget them. In small businesses we can explain to our bankers and to our shareholders the aims and objectives of the business and how it is 913 now time to review the future; how it is now time for a change of policy and to be more innovative. Similarly, there is an important role for the managers of large companies to do exactly the same.
I do not believe that there is an important role for government in this area. It is for the managers of businesses to make quite clear the views that are commonly expressed by managers of large companies, their importance to our community and the role that they have to play.
Small businesses went through a very difficult period in the 1980s, with a constantly changing financial climate on a micro and macro scale. It is very difficult for the small businessman to come to terms with that situation and to make the necessary adjustments. In my own case I remember how two or three years ago, in very buoyant economic times, money was thrust at us from every possible source. Now, at the very time when we want it most, there is none available.
Last night I was in Glasgow on business and I went to view the Burrell Collection. I should advise any noble Lord who has not done so to do the same. It was explained to me that Mr. Burrell, who accumulated that vast collection of very valuable items, made most of his money by investing in ships at the very time of the recession, when nobody else was investing in ships. It is my opinion that there is a need for our financial supporters to see that the very time we want money is when they do not want to give it to us.
When a private company owner looks at his company's situation sometimes his priorities might not always be the same as those of the owner of a large company. It may well be that a private owner and manager has different aspirations as to what he wants to achieve in the short term. Perhaps he wants to get a product into the marketplace; perhaps he wants to innovate something new about which he feels strongly. Very often the raising of capital is not necessarily one of his prime concerns, or even skills. There is a major re-educational task ahead for financial advisers, whether in banks, in clearing banks, in venture capital or accountancy, to assist businesses in general to be more financially aware and sophisticated in all the relevant aspects of capital management and capital-raising. That is an area in which many of them do not really become involved in the way that they should.
We also need to be aware that potential investors are seldom pursued with enthusiasm by larger companies. Often businesses with exceedingly good potential do not realise that potential and the owners are reluctant to give up equity. There are many companies that start off small and which could grow if they would only appreciate that it is far better to have a small piece of a large cake than to have nearly all of a cake that nobody wants to eat.
Reference has been made to a national industrial policy. I am totally opposed to the involvement of governments in industrial and business matters. Invariably, whenever they become involved they make a mess of it and it needs more and more legislation to try to put it right. In my opinion the role of government in industrial and business matters is, first, 914 to make it clear that they put success in industry as the prime and most important task of any government, because without the creation of wealth nothing else is possible. They should then keep inflation as low as possible; they should keep the costs of government as low as possible and should keep interest rates as low as possible. If they can clear those, the skills and abilities of the British Isles can make us all rich. For God's sake let us keep government as far away from that as possible.
§ 7.25 p.m.
§ Lord Holme of Cheltenham
My Lords, in rising to speak in this debate I would normally be irresistibly reminded of the remark of Senator Mo Udall, who found himself at a Democratic convention explaining to a rather puzzled delegate, after two days of speeches with two days still to go, what could be left to be done in the remaining time. Senator Udall explained it this way: he said:Everything that can be said, has been said, but not everybody has yet said it".Fortunately that has not been our problem tonight because, thanks to the scope of the resolution put down by the noble Lord, Lord Laing, we have had a very rich debate with many excellent contributions, notably a memorable maiden speech from the noble Lord, Lord Ashburton. Yet there is still lots left to say. It is a shame that we have had a debate in which the contributions have been limited to six minutes each.
I want to use the brief time at my disposal to pursue the theme of the responsible company. It must be right that capitalism and free markets have won, and that state socialism and command economies have lost, as the noble Viscount, Lord Caldecote, the noble Lord, Lord Skidelsky, and others have said. But this is no time for complacency. Those of us who live in a system with a free market and a developed capitalism know how very far short from perfect are these institutions and their operations.
I should like to explain briefly the respects in which I think the concept of pervasive responsibility, operating through companies, can contribute to an improvement in performance. I do not accept, as people sometimes do, that there is a conflict between responsibility and success. Long-term success is ultimately based on responsibility.
When asked why he comes to work, any manager worth his salt will say "My objective is to improve, optimise, maximise the return to the shareholders". Yet sometimes that is used as though it was the be all and end all. We all know that it is a necessary condition of corporate life but it is not a sufficient objective. It is not in itself sufficient. Perhaps I may explain briefly the ways in which a better rounded and more responsible company might succeed.
The first responsibility of a company—and it may sound obvious—is to itself, to the nature of its work and to the quality of its product. The noble Lord, Lord Nelson, said let us not try and ape foreign systems. But I think he would acknowledge and others would acknowledge that we can, in this respect, learn from the Japanese the concept of total quality 915 management. If we do not want to learn from the Japanese let us think of the words of that old Wesleyan hymn:Who sweeps a room as for the Lord Makes that and the action fine".We all know that the quality of goods and services in this country and the United States are too often second rate, too often shoddy and too often not of the high quality which makes us internationally competitive and fulfils the first obligation of anybody at work, which is to do as well as possible that which has to be done.
The second responsibility of a company is to suppliers and customers. By extension, the quality carries through to the customers in terms of value for money. In the modern world the complexity of distribution chains means that companies are linked to their lateral suppliers and customers in a chain of great complexity, often driven by computer information, which demands a partnership between all elements in the distribution chain. The old adversarial relationship that often existed between buyer and customer has to give way to one of partnership. There is an upside to that. If less goods are held in inventory, more of the capital employed can be invested in capital equipment and technology and in revenue investment of one kind or another.
A company also has a responsibility to its employees. The best companies in Britain already exercise this responsibility to the full, but not all are the best. In the best companies, managers communicate—a point made by an earlier speaker. In the best companies, workers are never hands; they are brains. In the best companies, there is a partnership—a point to which my noble friend Lord Grimond referred. It is a partnership based on sharing profit and decisions. In the best companies, there is single status. There is not a hierarchy of canteens, restaurants and car parks. There is equality at work which involves everyone in the workplace. In the best companies, profits and decisions are shared so that the commitment to the task is improved.
Finally, there is responsibility to the community, both national and local. More and more companies are recognising their environmental obligations. They are realising that to use less energy and the right materials can improve their success. Earlier in the debate my noble friend Lord Ezra referred to the relationship with investors. Outside directors have a crucial role to play. They should meet regularly with institutional investors. As regards investors, the responsibility to which I have referred has to be a mutual responsibility. It must cut both ways. It must be a responsibility for mutual achievement. Rather than the casino capitalism, which in the guise of helping industry has too often stunted and distorted it, we need between government and industry, between industry and the City, between managers and their employees and between all stakeholders a greater sense of partnership for shared success.
§ 7.32 p.m.
§ Lord Williams of Elvel
My Lords, the House will be grateful to the noble Lord, Lord Laing, for introducing this Motion. It will be grateful, too, for the maiden speech of the noble Lord, Lord Ashburton. I very much hope that we shall hear more from him in the future on this and other subjects.
It is almost impossible in the short time I have available to set out an Opposition line on the noble Lord's Motion. In fact I do not intend to do so because I agree with very much of what he said in his introduction. The noble Lord has a long and distinguished history as chairman and chief executive of a company that has tried to put into effect the kind of ideas that he has put forward to the House today. He speaks with great authority and we respect him for that.
The first point that occurs to me is that five years ago a debate of this kind could not possibly have taken place in the atmosphere we have experienced today. Attitudes are now starting to change. I have no doubt that five years ago we would have had a barrage from the Benches opposite of how important it was that the market and competition should rule. Those were the only criteria. I have initiated many debates in which we have had that barrage from the Benches opposite. However, we have not had it today. That marks a major advance in the thinking of the industrial community. For that we are grateful.
In his introduction the noble Lord, Lord Laing, cited the German constitution. He was right to do so. I remind him—this is about the only party political note that I shall sound—that the Federal German constitution was constructed by the Labour Party when in office. Built into it was a system of co-operation between workforce and employers which was viable then and is still viable today. It is a pretty good model.
The Motion refers to "an equitable balance". There has been some discussion between noble Lords about who constitute the stakeholders in any company. I was impressed, if I may so without disrespect, by what the noble Lord, Lord Benson, had to say on this matter. Stakeholders go much wider than shareholders; they go wider than employees or management; they go wider even than creditors. Indeed, and, as the noble Lord, Lord Holme of Cheltenham, has just said, in certain circumstances they go as far as customers. I would not go so far as the noble Lord, Lord Benson, and say that that is always the case. However, with some chains—I hate to cite the example of Marks and Spencer in the presence of the noble Baroness, Lady O'Cathain, but I must—
§ Lord Williams of Elvel
My Lords, I am sorry but I have very little time. As I speak from the Opposition Dispatch Box I feel that I should be allowed my full time. As I was saying, with some chains, customers are intimately linked to the supplier.
There has been a historical conflict. My noble friend Lord Bruce of Donington was right to say that 917 on the whole—I accept that it is on the whole—the capitalists have won the argument rather than the trade unionists or the banks. However, I am sure that noble Lords on all sides of the House will agree that it must be a major objective of this country to ensure the efficiency of our industry, particularly our manufacturing industry. I have argued that point and many noble Lords opposite have argued that point. We are at one in that regard. The prime objective must be to see how we can create an equitable balance which ensures that fundamental aim.
There are obvious difficulties in balancing the interests of the different stakeholders. There are obvious differences between noble Lords as to who should be responsible for such a balance. On the one hand, the noble Lords, Lord Boardman and Lord Sharp, argue that the managing director of a company or the board of directors should be responsible. Under Section 309 of the Companies Act 1985 directors of a company are to have regard in the performance of their functions to,the interests of the company's employees in general, as well as the interests of its members".That is the only guidance to directors on the performance of their functions. In the Companies Act there is a great gap in what the duties and functions of directors should be. I welcome what the noble Lord, Lord Grimond, said about ESOPS. I believe that that is the right way forward for us. The example of the United States, where these schemes can build up over the years to identify the interests of employees with management and shareholders, provides the right way forward. That is not to say that my noble friend Lord Shackleton is not right to point to another possibility—the John Lewis Partnership and the Co-operative movement—but I believe that it is right that the employees have in the end to be identified with shareholder interests. That is the right way forward.
The Motion refers to the need for capital management to evolve. In this context I refer to a debate that has taken place between a number of noble Lords along slightly different lines. I believe that the financial services industry taken in general—I do not like to refer to the City as such—is still regarded by the great British public as having something of a mystique. It is felt that there is something rather removed about what people do in running pension funds and so on. We must get away from that idea. As wealth grows—and we hope that it will—people's savings will no longer be invested only in their own homes, as has been encouraged by governments of both parties over many years; they will start to be diversified. There must be an industry which comes down to the level of the general public to ensure that they understand what is available and what it is all about in simple terms.
I also believe that it is not right, as noble Lords on all sides of the House have said, that takeovers should be determined by a few fund managers telephoning one another to say, "Are you going to accept such and such a bid at three o'clock this afternoon?"; answer, "Yes", "Right, we'll all go"—and that is the end of a great company without any regard to any other 918 considerations. As your Lordships will know, I have argued from this Dispatch Box on many occasions that we should shift the onus of proof in takeovers onto the company that wishes to make a bid and take over a company so as to determine whether it is in the national interest.
I turn now to the point made by the noble Lord, Lord Wade, with whom I disagree on almost every occasion; indeed, this is one of the occasions on which I again disagree with him. I believe that the Government have an important role to play. They must encourage the kind of partnership about which I think the noble Lord, Lord Laing, has been advising us this afternoon. The Government must ensure the accountability of financial institutions. They must do everything they can to ensure that manufacturing industry is given primary importance. Without that we are lost. That is why I welcome the Motion.
§ 7.41 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Reay)
My Lords, I should first like to thank my noble friend Lord Laing of Dunphail for giving us the opportunity to discuss the profoundly important issues which he has raised this afternoon. Surely no one has more right to raise issues of this nature than he has. He spent 45 years as a director of United Biscuits, 25 of them as either managing director or chairman. I gather that during that time the value of the company rose from £4 million to £1.6 billion and its sales from £4 million to £2.7 billion. The steady growth of the company—led, as I am sure it was, with far-sighted strategic vision—was reflected in its share price. I understand that a stake of £100 invested in United Biscuit shares in January 1945, with reinvestment of gross dividends, would have been worth £5,400 by the end of 1989, giving an average annual growth of 17.5 per cent., which is more than twice the retail prices index, and that between 1980 and 1990 the share value increased at an average annual rate of 23 per cent. So there was no divergence in that case between long-term managerial success and the long-term interest of the shareholder.
The debate provides us with an opportunity to examine whether we have the appropriate corporate and financial structures to best advance the long-term interests of British industry. Like the noble Lord, Lord Ashburton, to whom I shall return, I very much welcome the debate. It is surely right for us to take a look at other countries whose business and manufacturing record since the war has been better than ours to see what lessons we might be able to learn from them. I find it a remarkable and promising development that at last we as a nation are willing to look for lessons to learn from other countries' experience. It was never so when I was young: Britain, in our own eyes, always did things differently and best; and some may feel that we paid a heavy price for our former complacency. But I should like to add a word of caution at this point. Even if we were to find that other countries had organised things better, we should be foolish if we were to imagine that we could transplant their system wholesale—or, indeed, parts 919 of their system—into ours. As the noble Lord, Lord Ashburton, felicitously put it, it is pointless to try to plant avocados in Scotland.
All countries have their own particular structures and relationships which have developed over many years. They cannot with the wave of a government wand be introduced over here. No country can hope overnight to transform its pattern of corporate ownership and control even if it wanted to. We may seek to try to influence shareholders' perception of their responsibilities, even of their long-term interests. But we must live with the basic pattern, and what we seek to change has to be viewed in the context of our industrial life and not someone else's.
I have a further point to make. There is no logical reason why there should be an inherent conflict between the interest of the shareholder and the long-term interest of the company. Here I agree with what the noble Lord, Lord Holme, said. If a company is perceived to be investing wisely today, its share price should, even in the short term, reflect in anticipation the profits that that investment will generate. If shareholders desert a company that undertakes heavy investment, that may reflect a lack of confidence in the management's judgment, but it is not self-evident that the shareholders are wrong.
It may be the case that there is an insufficient degree of trust in British management by the City. It is possible, perhaps as a result of earlier disappointments, that shareholders have a tendency to under-value the capacity of British management to invest wisely for the future. Alternatively, it may be the case that British management is failing to project its full worth to the City. If so, there is perhaps a communications problem. But when the City is convinced of the quality of management and where the City has confidence, for example, in the future commercial value of research and development undertaken by companies' management (as is the case with a number of major British companies) then institutional shareholders do not necessarily desert those companies because of their commitment to the long term, to which institutional shareholders are allegedly allergic. For example, companies in the pharmaceutical sector combine very high levels of research and development with very high market ratings—proof that the argument of my noble friend Lord Laing that heavy investment in R&D depresses share prices is not necessarily true.
I am entirely at one with those who assert that we need more innovation in this country and more commitment by industry to research and development. It is precisely in order to stimulate greater spending on R&D by firms that the Innovation Advisory Board of the Department of Trade and Industry arranged to compile and publish the first British R&D scoreboard. The department has also recently set up an innovation unit which is designed to raise the status of innovation and improve communications between companies and investors.
My noble friends Lord Laing and Lord Pennock both took British companies to task over their dividend policies. However, I do not think that it is correct to view dividend payments as simply 920 investment forgone. Dividends are a means to attract new investors and new capital to the market. It is also the case that amounts paid out in dividends are relatively small in comparison to the total capital spending of companies. As a result, the rapid rise of dividends which my noble friend Lord Laing pointed out as having taken place in the second half of the 1980s—which I may say took place partly because of rising profits—occurred at the same time as a period of the fastest business investment growth seen in this country since the war. Nevertheless, I agree with recent statements made by the Governor of the Bank of England that in appropriate circumstances the deliberate reduction of dividends can be the mark of a responsible and resolute management.
I should like to say something about the specific proposals put forward by my noble friend Lord Laing and other speakers, although I must make the point which was recognised by the noble Lord, Lord Grimond; namely, that at this time of the year I cannot be expected to comment on specific proposals for changes in taxation. Nevertheless, as regards the tax privileges of pension funds, I should like to point out that governments of all political colours have wished to encourage people to make financial provision for their retirement. Moreover, that policy has been highly successful. Half of the working population is now covered by an occupational pension scheme and a further 4.5 million people have personal pension plans.
So far as concerns the desire of my noble friend Lord Laing that companies should restrict voting rights to shares which have been held for at least 12 months, it is in fact open to companies to do that by altering their articles of association. Of course that can cut both ways. It may help to protect an efficient management from an unwanted takeover, but it may also be the device of an inefficient management to save its own skin. However that would undermine the basic principle that the owners carry the risk, in return for the right to appoint the directors and have a say on major issues affecting the company. I must add that the view until now has been that share issues with unequal voting rights are confusing and contrary to modern principles of transparency and the equal treatment of shareholders, and the Stock Exchange has long been encouraging their disappearance.
My noble friend Lord Laing referred to the recommendation of the Trade and Industry Select Committee in another place regarding the criteria according to which the authorities should decide whether or not to block a proposed takeover. We shall be replying to the Select Committee's recommendations in due course. I would only point to the fact that the Select Committee endorsed our view that policy on mergers should continue to be based mainly on competition grounds and that it did not think that the bidding company should be put in the position of having to prove that a takeover was positively in the public interest before it should be allowed. Our present system is designed not to favour one side or the other. The Government take the view that the interests of the shareholders will in general diverge from the public interest only where competition issues 921 are at stake. We do not exclude that in particular cases other issues might lead to an MMC reference, but those will remain very much the exception. Provided that markets are working properly, there is no reason why investors should not share a well-run company's estimate of what will serve its long-term interest, and why expectations of long-term performance should not be properly reflected in the share price.
Our view is that the threat of takeover provides a useful discipline on management. I therefore agree with the conclusion of the noble Lord, Lord Ashburton. Other countries have other means for keeping management efficient; we have takeovers. If takeovers were disallowed, or made substantially more difficult, there would be little or nothing to disturb the life of the incompetent manager. The Select Committee observed that the relative protection from the threat of hostile takeovers enjoyed by companies overseas can make managements less responsive both to the needs of shareholders and to the long-term interests of the company and its employees.
My noble friend Lord Sharp raised the issue of reciprocity. It is often suggested that bids for foreign companies which are themselves bid-proof should be disallowed. We have given careful thought to that matter. We understand the concern that there should be a level playing field, but on the whole our view is that, in takeovers as in other trade policy matters, it is in our broader interest to follow an open trading approach. We want to see barriers brought down rather than new ones erected. It follows that we should not pursue a policy of reciprocity; that is to say, of disallowing bids which originate from companies which are allegedly bid-proof themselves. For one thing, whether such companies are in fact bid-proof is not necessarily possible to establish; it is certainly in the circumstances a hypothetical question. More importantly, a bid refused on grounds of reciprocity might have undesirable repercussions. It might for instance lead to acquisitions of foreign companies by British companies being prevented, or to some unrelated act of commercial retaliation. In other words, it risks widening the area of potential international trade conflict. A more positive avenue which we have been following within the EC is to seek to outlaw company law restrictions which place obstacles in the way of takeovers, thus placing Britain and other member states on a more equal footing. We have however to recognise that national structures and cultures probably play a larger role than legal restrictions in that area; so on the whole we do not think it right to have a policy of reciprocity. We want access for our companies overseas, wherever they wish to go in search of new markets and new opportunities. British companies are substantial overseas investors and we wish to do nothing to reduce their scope, including their scope to expand by overseas takeover. By the same token, we see this country as having been a great beneficiary from inward investment, and we wish to do nothing that might deprive this country of the benefits of foreign capital and expertise— 922 including management expertise, in which area it appears that the Japanese, in particular, have much to teach us.
Shareholders can play an important role in sound conduct of company affairs. My noble friend Lord Nelson asked for a more pro-active Department of Trade and Industry. Indeed we should like to see managers and trustees of investment funds taking a more active interest in the companies in which they invest. We welcome the guidance given recently by the Institutional Shareholders' Committee, which listed many ways in which institutional investors might involve themselves more closely in the companies in which they hold stakes. They were referred to in some detail by the noble Lord, Lord Ezra, and I shall not go into them any further now.
My noble friend Lord Boardman drew attention to the role of auditors. He expressed anxiety about conflicts of interests between a firm's auditing role and its other business, such as consultancy. Those suggestions merit careful consideration. I expect that they will be considered in detail by the Cadbury Committee on the financial aspects of corporate governance. That committee is well equipped to study all sides of the issue, and we look forward to receiving its report later this year.
My noble friend Lord Laing introduced into the debate, into the terms of the Motion and into his speech the word "stakeholders". He implied that companies have obligations to interests beyond those of their shareholders. The noble Lord, Lord Skidelsky, questioned the value of that concept, but we agree that other stakeholders, apart from the shareholders— customers, employees, creditors, suppliers and the general public—have legitimate and important interests which are now recognised by law. Any well run company now knows that it has to recognise those wider obligations as a condition of its success.
I welcome what the noble Lord, Lord Shackleton, said about the value of employee involvement in the John Lewis Partnership. We agree that employee involvement contributes to the prosperity of the company, as well as to the quality of working life of the employees. So we encourage and promote effective employee involvement. For example, the Department of Employment has recently launched, jointly with the Confederation of British Industry, an initiative to demonstrate the importance of employee involvement in key aspects of business performance. But we believe that companies themselves should work out the ways that best suit them for involving employees in their business. Given that their circumstances can differ so much, what we do not want is a mandatory procedure which would require all companies to do it in the same way.
The noble Baroness, Lady O'Cathain, rightly drew attention to the wider share ownership achievements over the past decade. The Government have encouraged financial participation by employees through the privatisation programme which has given employees unprecedented opportunities to acquire a stake in the businesses in which they work (90 per cent. of those eligible have done so)—and through a range 923 of tax reliefs for schemes such as employee share ownership and profit-related pay. No fewer than 2.25 million employees benefit today from approved all-employee share schemes.
The noble Lord, Lord Grimond, expressed some anxieties about ESOPs. He would like an assurance that I shall draw the attention of my right honourable friend the Chancellor of the Exchequer to his remarks. Indeed, I shall do that.
I enjoyed the maiden speech of the noble Lord, Lord Ashburton. I regretted, perhaps more than he, that it had to be confined within the six-minute limit. It contained the distilled wisdom of a lifetime's experience in the City, and was delivered with an assurance that would have deceived anyone who had not been told that the noble Lord had taken the Oath only yesterday. I greatly look forward to hearing further contributions from him.
The noble Lord, Lord Benson, called for a national industrial policy. As noble Lords may have gathered, I am sceptical about the necessity for such a policy. We believe that prescription from above on matters which are best left to companies and their managers would not be a helpful move.
My noble friend Lord Brentford mentioned gifts to charity. I agree with him that companies would benefit from increasing their gifts to charity. The noble Baroness, Lady O'Cathain, referred to the humanisation of industry which has taken place in recent years. I am happy to acknowledge that industry has been attracting better brains and has become more democratic and a more attractive place in which to work.
My noble friend Lord Caldecote emphasised that companies should play a constructive role in the community. I agree. On communications with investors in industry, my noble friend Lord Wade made the interesting point that small companies can be better at communicating with their investors than some large ones. We must take that into account.
I welcome the endorsement by my noble friend Lord Sharp of our policy on takeovers by state-owned companies, of whatever nationality. Sometimes such takeovers can raise competition concerns. The proposed takeover of ICI's business was a case in point. It was blocked by my right honourable friend the Secretary of State for Trade and Industry after an adverse finding by the Monopolies and Mergers Commission.
Over the long term, the welfare of all the stakeholders in companies will depend on the competitiveness of British industry. We, the Government, have set the scene. The United Kingdom experienced faster business investment growth in the 1980s than any other of our G7 partners, with the exception of Japan. In that period our manufacturing productivity grew faster than that of any other major competitor. R&D spending by industry—surely the most valuable—has grown by nearly 50 per cent. in the last six years for which figures are available. Inflation—perhaps of all phenomena the most damaging as concerns long-term planning because it destroys confidence in the future—has been reduced to the German levels for the first time in a generation.
924 Industry has been given the environment in which it can flourish. It has the backing of a government which knows the importance of giving business its head. We have provided free markets, the lowest corporation tax rate of any major industrialised country and a vastly reduced burden of regulation. Our policy of bringing down direct taxation has restored personal incentives.
Unlike the party opposite, we do not intend to overload industry and its employees with high taxation, excessive regulation and a host of restrictions and instructions. When we have weathered the recession, as we will, it will be up to industry to make the most of all the opportunities beckoning to it from the whole wide world.
Let us hope that the management of industry, with the active support of its shareholders, will address itself to the problems and chances which only it can grasp and solve.
§ 8.2 p.m.
§ Lord Laing of Dunphail
My Lords, I wish to thank your Lordships for attending this debate and contributing to such a stimulating and, I hope, worthwhile discussion. I wish to add my congratulations to those of everyone else to my noble friend Lord Ashburton. I thank the Minister for making his points so clearly. In due course I shall enjoy returning to the subject, when I shall try to be more persuasive. My Lords, I beg leave to withdraw my Motion for Papers.
Motion for Papers, by leave, withdrawn.