Theresa May needs to take shareholders with her

In her last major speech before entering Number 10 as prime minister, Theresa May eerily echoed remarks made by the former Labour premier Tony Blair 20 years earlier: “Transient shareholders are not the only people with an interest when firms are sold or closed,” she said. “Workers have a stake, local communities have a stake, and often the whole country has a stake.”

Mr Blair, in a speech delivered in Singapore shortly before he took power, asserted that it was “time to assess how we shift the emphasis in our corporate ethos … towards a vision of the company as a community or partnership in which each employee has a stake”. Yet what had promised to be a defining philosophy for New Labour was scarcely heard of once he was in office.

What is the risk of the new prime minister’s intentions to reform governance being derailed in the way that happened to Mr Blair’s two decades ago? Mrs May’s proposals have been studied with curiosity and unease in the City and the country’s boardrooms. Boards know they need to change, yet they represent vested interests with a stake in maintaining the status quo.

The risk of derailment this time round is lower, however, because Mrs May’s timing is good. Mr Blair’s Singapore speech occurred in the halcyon days of liberal economics. There was little pressure for change in a prosperous world in which the rising tide of free markets appeared to be lifting all boats.

The banking crisis of 2008 discredited pure free-market capitalism. The subsequent recession led to discontent with the political and economic establishment that culminated in the vote for Brexit. The public mood is clear: this time, change has to happen.

But there needs to be a measured response. A successful financial and business system is the prerequisite for a thriving, cohesive society and this is a delicate moment. The economy is at a tipping point and the UK’s position as a global business capital is being questioned as a result of the referendum result. Essential change, therefore, must be implemented without the economy missing a beat.

Many of Mrs May’s proposals have a domestic thrust. These include strengthening competition policy, developing energy and industrial strategies, encouraging research and development and issuing Treasury infrastructure bonds. Such measures need have no bearing on the UK’s global appeal as a business centre.

Others ideas, such as challenging egregious corporate tax avoidance practices, the introduction of binding votes on pay and consumer and employee representation on boards, will cause global companies to think — and so they should. It may be that the consequence of such reflection is that business acknowledges the need for change and reforms itself, but regulation and incentives are also likely to be required.

The key actors here are not the boards, but shareholders. The days when short-term shareholder value was a primary objective rather than an end-product of good business practice are long gone: even Jack Welch, former chief executive of GE and the high priest of 20th-century shareholder value, now acknowledges it to have been “a dumb idea”.

A more sophisticated form of shareholder value is now possible. Big institutional investors today have specialised governance functions, but many are frightened to use them properly. They should be helped to engage responsibly — for example, by incentives such as dividend tax credits for long-term shareholders in companies that meet selected governance criteria.

The case for change is overwhelming. A Labour government backed off reform, leaving a Conservative prime minister to make the case for the managed market. As Ray Davies of The Kinks sang in 1970: “It’s a mixed up, muddled up, shook up world …”


Comments are closed.