New labour's flirtation with the stakeholder idea came and went in an instant. The only lesson to be drawn from Tony Blair's retreat from the enthusiasm he expressed in his Singapore speech, almost exactly one year ago, is a rather sad one about contemporary politics. There is now, it seems, a bipartisan consensus on electoral tactics: no party can hope to win without first draining the political debate of intellectual content and promising to put more of the population in jail.
Stakeholding will outlive these political exigencies. In the post-socialist world the stakeholder idea is alone in offering a coherent response to the extremist individualism expounded by the new right. Its problems are ones of presentation rather than content, which is rooted in solid economics and business experience. The task for advocates of stakeholding is to demonstrate why its principles are relevant to modern Britain and to come up with practical proposals that are compatible with the country's history, culture and traditions.
But first, it is necessary to look at the arguments of the critics. One of the most effective critics, in the pages of Prospect and elsewhere, has been the Tory MP David Willetts. He asserts that stakeholding is a radical and alien import which is subversive of the individualistic British tradition. What is more, he continues, Japan and Germany, the two pre-eminent stakeholder economies, are in deep trouble and no longer have anything to teach the rest of us. Another attack comes from economic liberals such as Samuel Brittan of the Financial Times, who argue that in its application to the firm, stakeholder theory blurs accountability and offers confusing objectives to management. Finally, there are those on both left and right who feel that the whole idea is simply too elusive. The language of "inclusion" is all very fine, but what does it really add up to in practice?
If Willetts scores points, it is largely because his critique is directed at arguments advanced by Will Hutton in his book The State We're In. While Hutton has many useful insights into the British economy and the City-and has undeniably struck a chord with the public-his book betrays an instinctive suspicion of the free market and a passion for the more interventionist, subsidising habits of Germany and Japan. Above all, The State We're In is an example of that characteristic English genre, the literature of decline, belonging to the subtype which worries about a shrinking manufacturing base and attributes it to the dominance of finance over industry. Hutton sometimes implies that all our ills stem from the City when in reality short-termism is just as prevalent in company boardrooms and in government itself.
The peculiarity of this declinist tradition is that it has thrived for over 100 years despite the British economy's unyielding propensity, through boom and bust, to grow at a long run peacetime rate of around 2 per cent a year in real terms. It also confronts a difficulty, as does Labour's current economic rhetoric, in that Britain's growth rate over the past decade and a half is little different from that of Germany, France and Italy, while the British performance on job creation and productivity has been much more impressive than theirs. Indeed several features of the British economy-its flexibility, its strength in services, and its openness-make it increasingly well adapted to the international economy. Huttonomics, then, offers a relatively soft target for Willetts.
Yet Hutton's is simply one version of stakeholding. There are plenty of others, including a well known Tory one called popular capitalism. Nigel Lawson (from whom I have cheekily borrowed the title of my new book A Stake In The Future) puts it in his memoirs like this: "Those who in the 19th century saw the dangers of a mass democracy in which a majority of the voters would have no stake in the country at all, had reason to be fearful. But the remedy is not to restrict the franchise to those who own property: it is to extend the ownership of property to the majority of those who have the vote. The widespread ownership of private property is crucial to the survival of freedom and democracy... It gives the citizen a stake in the future..."
This form of stakeholding, which found expression in the Tories' privatisation programme, was the answer to old Labour's version of the idea-providing a stake through public ownership. Yet like nationalisation, popular capitalism failed. Many who aspired to home ownership discovered negative equity and repossession, thanks to Lawson's economic policies. An unintended consequence of Tory stakeholding was to put many working class Tories back in their proletarian box. It also reduced labour mobility, impairing the efficiency of the economy.
As for wider share ownership, the number of shareowners did increase under the Tories from 3m to 11m at the peak in 1991. But most of these owners have shares in no more than one enterprise, and they are progressively reducing their holdings in favour of other, tax-privileged forms of investment. And the democratic value of their stake was amply demonstrated in the vote over "fat cat" pay at the British Gas general meeting in 1995. Private shareholders who exercised their voting rights against the board were hopelessly outvoted by the absentee investment institutions.
The German and Japanese forms of stakeholding have delivered a great deal more than this, not least because they focus on the workplace, which provides a more direct sense of involvement in the economy than fragmented share ownership is ever likely to do. If they are now in trouble, it is not because the idea is inherently flawed, but because their respective models have become unbalanced. In a stakeholder economy the manager is a trustee balancing various stakes-of employees, shareholders, bankers, suppliers, the community-to foster the wider economic and social purpose. In the first three decades after the war, investors and depositors in these economies were financially disadvantaged in relation to other stakeholders. This was because their heavy regulated and bank-dominated financial systems were designed to deliver low cost capital to industry.
That bias was sustainable at the time because there were more than enough trade-offs to make the low returns acceptable to savers. But the justification for a penalty on the returns to capital no longer exists now that the two countries are rich, their populations are ageing, their economies are growing more slowly and capital has been given global freedom of movement. Indeed, the penalty has become destructive. In Japan the low returns accorded to savers have exacerbated a banking crisis that threatens to bring the economy to a standstill. This is because the banks and insur- ance companies are themselves among the country's biggest investors as members of the informal keiretsu groupings through which Japanese companies do business.
Those like Will Hutton who envy the low cost of capital enjoyed by German and Japanese firms fail to grasp that this has ceased to be a source of competitive advantage. It is, in reality, a reflection of structural imbalance in economies with an excessive propensity to save. Japan's absurdly low cost of capital in the 1980s encouraged a wild surge of investment in uneconomic projects and was associated with a gigantic stock market and property bubble from which the economy has yet to recover. While Germany has escaped the Japanese liquidity trap, the productivity of its capital is similarly low relative to that in the English-speaking economies.
In both Germany and Japan excessive regulation now acts as a brake on economic growth. And in their financial systems, these countries are in the anachronistic position of rationing capital that is no longer scarce. In a world of free capital flows, capital subsidies and artificially low returns are a recipe for destabilising exchange rates. In effect, they offer a permanent incentive to capital flight. Because in Japan the impulse to flight has been bottled up by regulation, and by inhibitions resulting from earlier loss-making investment in foreign assets, the alternative outcome has been inflation in asset prices. The trouble will come when investors recognise that the conditions which ensured consistent structural appreciation of the deutschmark and yen have evaporated. If the Germans are lucky, the decline of the deutschmark will be mitigated by Emu. But the decline in the yen will be accompanied by collapsing share prices in Tokyo.
A consequence of the failure of the Germans and Japanese to bring their stakeholder models up to date is that these hitherto cohesive societies are feeling the strain. In Japan the sense of national unity has been eroded by the rise in land prices that disadvantages managers and workers in industry relative to farmers and other property owners. For the Germans unification has turned out to be more divisive than necessary because the bill has increased the already heavy social overhead carried by individuals and companies in the west. But the solution does not lie in the adoption of the Anglo-Saxon model, any more than the answer to Britain's problems lies in adopting the German or Japanese models.
Whatever their financial weaknesses, countries such as Germany and Japan enjoy a comparative advantage deriving from what Francis Fukuyama, and the British economist Mark Casson, have called a "high-trust" ethos. Because employees there can be relied on to work towards a common goal, the need for performance-related pay is less than it is in the Anglo-Saxon world. Income differentials tend to be narrow, which in turn helps reinforce the sense of common commitment.
Since individuals readily subordinate their own interest to that of the group, their behaviour does not have to be constantly and expensively monitored by supervisors, formalised in private contracts, or enforced in the courts. These "transaction costs" constitute a large proportion of the overall costs in any economy, so the ability to keep them low confers hard competitive advantage in relation to societies that place much greater emphasis on the exercise of private property rights.
How alien is this trust model? Clearly Japanese consensualism, exemplified by the company song, is not readily exportable. There are also aspects of the culture of some stakeholding countries-the Swiss and German treatment of guest workers, the Japanese attitude to the Korean underclass, the second class status often accorded to women-that a liberal Anglo-Saxon country would be better off without. But the teamwork ethos, the close cooperation with suppliers over just-in-time inventory management equally clearly do travel well. And stakeholder values are anyway already apparent in British companies as diverse as Marks & Spencer, Unipart, the John Lewis Partnership and the Anglo-Dutch giants Unilever and Shell.
These companies appear to be good at fostering what sociologists call social capital: the intangible wealth represented by education and training, cooperative working practices, loyalty and commitment. In businesses which rely heavily on human capital, stakeholding confers competitive advantage and, quite as important, encourages employees to feel good about what they do. In those where physical capital is more important, stakeholder values may have less to offer.
This is not radical. Nor is it new. Indeed, until recently most large British companies were managed on a basis much closer to the trusteeship model than they are today. As John Kay has argued, a trusteeship model in which management seeks to balance the interests of stakeholders in the long term interest of the company, as opposed to the shareholders, is a more accurate description of how large companies work than the textbook principal-agent model, in which the owners of capital delegate control to managers. What is radical in British capitalism is that the introduction of contested takeovers in the late 1950s, together with the more recent arrival of the concept of "shareholder value," have pushed the model a little closer to the textbooks.
The concept of shareholder value is to economics what public choice theory is to politics. Public choice theory is the discipline that regards politicians as utility maximisers who use their office to trade policies for votes and seek to extract as much personal economic benefit from their office as possible. The political process is seen as a market in which bureaucrats put the expansion of their empire before the pursuit of the public good. The proponents of shareholder value posit a similarly narrow view of the company and its management, arguing, in effect, that unless managers are forced constantly to focus on shareholder value, they too will behave as personal utility maximisers and use corporate assets for their own ends. Hostile takeovers provide the discipline to enforce the primacy of the shareholder.
As with public choice theory, this narrow view of human motivation contains an element of truth. The resulting emphasis on financial discipline means that the productivity of capital in the English-speaking economies is much higher than in continental Europe or Japan. The snag-and here Will Hutton and John Kay score many telling points-is that the takeover discipline does not enhance shareholder value or improve accountability. In practice it has led to a corporate culture in which managers have a powerful incentive to engage in the adrenaline-promoting takeover chase instead of the hard grind of enhancing the operations of the business. They sign up for what the canny US investor Warren Buffett scathingly describes as the "gin rummy" school of management: pick up a few businesses here, shed a few there, shuffle the pack. For their part, many investment institutions are happy to rely on the takeover as the monitoring mechanism of first and last resort. So much easier than taking a more direct interest in corporate governance.
Most of the academic evidence suggests that in the majority of cases the shareholders in the winning company lose out-the "winner's curse"-and that little improvement in economic efficiency results. There is also statistical evidence that takeovers are indiscriminate, in the sense that they do not appear consistently to identify companies where management is failing. What we do know for certain is that the transaction costs involved in this method of changing management are high-witness the recent battle between Granada and Forte. And once a management has overpaid for the bid victim, it finds itself under exceptional pressure to deliver increased profits. The quickest way to raise profits is to cut investment in human and physical capital. So the takeover process becomes profoundly destructive of human and social capital. And the damage is exacerbated by an antiquated accountancy practice that records human capital as a cost, not an asset. It is thus all too easy for managers to declare increased profits while destroying the real worth of the firm.
There are some companies for which the hostile takeover may be necessary. In others, this is the corporate equivalent of the medieval surgeon's practice of bleeding the patient. The problem is that the shareholder value school's primitive model of the corporation, in which shareholders are seen as earning all the returns and bearing all the risks, is a throw-back to an earlier time when the typical company owned and operated simple undertakings such as a canal, a railway or a physical plant. In the more complex enterprises that dominate the modern economy, it seems pedantic to call the shareholders the risk-takers. Under the twin pressures of the tax system and the takeover process, their dividends have become increasingly inflexible. For the big institutions that own more than 60 per cent of all quoted equity shares, the risk of corporate bankruptcy is minimal. Employees, in contrast, have often made investments in training that are specific to the firm. Unlike the dividend, these just-in-time people are readily chopped in the downturn.
The British form of capitalism, unlike the Japanese, is built on an atomised view of society. The manager, the worker, the customer, the supplier and the shareholder are all in separate boxes; and their respective contributions are ostensibly directed via the capital market towards the goal of looking after the interests of the pensioner. The fact that you cannot be the beneficiary of a pension fund without first being an employee is neglected. The system will see to it that you are insecure while still in employment, and secure only in retirement.
Yet the chief beneficiaries of the pension funds are not the pensioners. They have been largely excluded from the super-normal returns seen in the stock market over the past 20 years. This is because the typical company pension fund exists to guarantee a promise to pay a given level of pension. The fund is owned by the company and does not offer employees an ownership stake in the prosperity of the nation. The result is that the system ends up being circular. Stock market pressures ensure that executives maximise short term profits and pay high dividends in order to keep the share price up and the predators at bay. This contributes to pension fund surpluses which are ploughed back into the company's profit and loss account allowing yet further dividend income to flow into the pension funds.
The circularity of this process helps explain why the mechanism that normally leads from economic growth to a sense of well-being has broken down in Britain, at least in large companies. Profit has become the end instead of the means. The beneficiaries are directors whose incentive schemes are geared to short term profitability. And the morale of the workforce sinks as it sees an ever widening income gap with the boardroom.
The rough-and-tumble British form of capitalism is not without its merits. In confronting the challenges of rapid technological change and increasing international competition, Britain has adapted more readily in recent years than the stakeholder economies of Germany and Japan. By turning people into insecure and overborrowed workaholics, the Anglo-Saxon model has enhanced competitiveness and helped arrest the country's relative decline. But anyone outside the boardroom is entitled to say, so what? Relative decline, which was accompanied in practice by absolute increases in living standards, offered a more comfortable existence than today's world of macho management and insecurity.
The attraction of stakeholding is that it addresses many of these concerns by placing markets in a social context. It insists that the exercise of property rights entails obligations that do not begin and end with the property owner, but extend to the wider community. More specifically, it contains an injunction to adjust market mechanisms to take account of social costs and benefits that are not explicitly priced in today's market. If the idea sounds elusive, it is because it places so much emphasis on the role of culture. This makes it a challenging doctrine for politicians, since it consciously downgrades the role of the state at one extreme, and the role of the individual at the other, in favour of intermediate institutions-companies, unions, churches and so on.
How do you change the culture of a country? Only slowly, and through policy changes that run with the grain. Such policies should address the flaws in the capital market, and the related labour market problems, by throwing sand in the takeover machine, thereby making it easier for companies to maintain investment and employment through the economic downturn. The bias in corporation tax in favour of high dividend payments to pension funds needs to be addressed. And the investment institutions themselves-the rotten boroughs of the capitalist system-need to be opened up. A more transparent exercise of institutional power, accompanied by compulsory voting on company resolutions and disclosure to the beneficiaries of how the votes are exercised, would encourage more responsible corporate governance and compensate in part for the loss of discipline arising from a less active takeover market. It would also make sense to move away from the paternalistic defined benefit pension system, which makes people more expensive to employ as they grow old, towards a money purchase system where people's pensions are based on the investment returns on the contributions paid in.
The future of the left does not lie in the negation of individualism-least of all when flexibility is at a premium in a time of very rapid economic change, and information technology is opening up new opportunities for innovation and self-employment. And the stakeholder critique of economic liberalism is not an inherently collectivist one. Indeed, as John Kay has pointed out, it is really rather conservative. Stakeholding is in essence responsible individualism.
