Troubled relationship: David Cameron, right, has admitted getting too close to newspaper proprietors, says David Davis, left
It is fashionable to declare that the western model of capitalism has failed. Some laud the success of China, but that stems from state capitalism which rests on an average wage one tenth of that in Britain. Others admire the chaotic capitalism of India, but it succeeds for the same reasons. The differences are not always that clear cut; within western capitalism there is a wide spectrum of societies. A recent report by the OECD, the international economic body, showed social mobility in Britain and the US was far lower than in Australia, Canada and Scandinavian countries.
In Britain, the symptoms of western capitalism’s sickness—rocketing executive pay, bankers’ bonuses, shameless tax avoidance and cosy relations between politicians, press barons and business leaders—have become known as “crony capitalism.” Since the term was coined, coalition and opposition leaders have battled to be seen to lead the fight against crony capitalism and all that it entails. But when it comes to crony capitalism, government is often not the solution, but part of the problem.
In September last year it was announced by the Department for Business, Innovation and Skills that the bosses of Britain’s 50 biggest companies would be assigned ministerial “buddies,” to give them a hotline to discuss their concerns. The aim? To boost investment and kick-start the economic recovery. But many will see this as proof the government pays too much attention to big business and is too close to its top executives. Where is the hotline for small business leaders?
Then there are the revelations that Her Majesty’s Revenue and Customs (HMRC) has allowed some of the world’s biggest companies to pay far less tax than they owe. Companies that have allegedly benefited from HMRC’s generosity have been investigated by the Public Accounts Committee following reports in the media and dismay among the public.
Worse still, small businesses this year face new fines of hundreds of pounds for filing their tax returns late, even if they have paid every penny they owe. This is the network state in action, a place where contacts count and what you do matters less than who you know. What better illustration is there than the knighthood given to Fred Goodwin, the former chief executive of Royal Bank of Scotland, who was stripped of his title on 31st January?
Hard as it is to believe, he was ennobled in 2004 for “services to banking.” Under Labour, Goodwin chaired a Treasury taskforce, served on Gordon Brown’s International Business Advisory Council and was a trusted adviser to the then chancellor. Even as RBS teetered on the verge of collapse in 2009, the last government was happily signing off his multi-million pound pension, courtesy of the taxpayer. Nor is this an isolated example. At the time of the financial crash the bosses of RBS, HBOS and HSBC all had honours to their name. Between 1999 and 2006 Labour ennobled no fewer than ten bank bosses.
And this government got itself into a terrible pickle over whether the current RBS boss Stephen Hester would pocket a £1m bonus on top of an annual salary which dwarfs most people’s lifetime earnings. Eventually he rejected his bonus, but the government thinking is instructive.
Apparently the government, which owns 83 per cent of RBS, feared Hester would quit if it vetoed the bonus. So what? A business doesn’t instantly collapse if the chief executive leaves. Antonio Horta-Osorio, the chief executive of Lloyds Banking Group, recently took two months off with stress and the bank carried on. At least he had the decency to turn down a bonus this year.
After chairing the independent Future of Banking Commission I find it laughable that politicians imagine the banks are so difficult to run. If Hester did quit I doubt there would be a shortage of suitable applicants for a prestigious, £1.2m-a-year job. At a time where living standards are falling fast, handing huge bonuses to the heads of banks which owe their very existence to taxpayers should be out of the question.
The ill effects of crony capitalism in banking are not limited to undeserved honours and unjustified bonuses. Labour’s closeness to the financial sector led to it restricting competition authorities from intervening in financial services, and this played a huge role in creating and sustaining our monopolistic banking sector. Spain has 20 major banks. With the sixth largest economy in the world, it is nothing short of absurd that Britain has just five major high street banks, the same number as Belgium.
An uncompetitive high street is not just bad for consumers; it is a threat to financial stability. As we saw during the crisis, having so few major banks on the high street means that if one fails it takes the rest down, threatening the banking system. With a more competitive high street, there will be no such thing as “too big to fail.”
Crony capitalism has also characterised political leaders’ relationships with the press. Prior to the phone hacking scandal, the shameless courting of Rupert Murdoch and other media moguls by politicians was no less unedifying for being standard practice. That cosiness went far beyond exclusive interviews and off the record briefings. Tony Blair is godfather to Rupert Murdoch’s daughter Grace. Gordon Brown and his wife Sarah hosted a pyjama party at Chequers attended by the former News of the World editor Rebekah Brooks and Rupert Murdoch’s wife Wendi.
Throughout their time in power, calls to tighten press competition laws were repeatedly kicked into the long grass by a Labour leadership that was anxious not to offend News International. Of course this is not just a Labour problem. David Cameron has accepted in parliament that he got too close to newspaper proprietors after becoming leader. It is arguable that the Leveson inquiry should be looking as much at the behaviour of political leaders as at the behaviour of newspaper editors.
This problem is worse in Britain than it is in many western countries partly because, after a century in which our social mobility was the envy of the world, we have turned into a stratified state, where the opportunities for the poor have largely evaporated. Social mobility provided the moral justification for much of the inequality in Britain. It did not matter if people were unequal, if it reflected their contribution to society and everybody had a decent chance at the big rewards. With Sutton Trust studies demonstrating that all the professions are now dominated by the products of public schools, that is patently no longer true.
***
So how do we tackle crony capitalism? If the western model is to succeed we must rediscover the kind of competitive attitude American antitrust campaigners demonstrated in the middle of the 20th century. In the 1940s these men spoke of the “curse of bigness”—a recognition of how vast businesses which dominate and distort the market can be an industrial and social menace. Yet this did not stop America becoming the world’s only superpower. As one senator put it, “if we will not endure a king as a political power we should not endure a king over the production, transportation and sale of any of the necessities of life.”
Without this competitive spirit, western capitalism is socially and economically fragile. To solve this problem, we need to reduce the concentration of power and wealth dramatically.
In business, we need to drop the idea that biggest is best, and that Britain’s economic health is well served by focusing ministerial attention on a few dozen multinational corporations. After all, today’s business giants are not necessarily tomorrow’s successes. Many companies that became household names in years gone by—Northern Rock, Thomas Cook, Taylor Wimpey and dozens of others—have since fallen out of the FTSE 100 altogether.
As businesses grow too large it inevitably creates a damaging dehumanising effect. In days gone by bank managers would develop strong ties with (and knowledge of) local businesses. When banks instead began to focus on international expansion and trading financial instruments, these local relationships disappeared. Decisions on bread-and-butter banking issues, like business loans, started to be assessed centrally using standardised mathematical formulae, and small businesses suffered. Of course this dehumanising effect does not just apply to banks. Today many large companies trade only online, avoiding personal contact with their customers. With some companies now it would take a private detective to find a contact telephone number.
Most importantly, though, Britain’s small and medium-sized businesses are too economically important to be ignored. Together they account for 99.9 per cent of British enterprises, employ over 20m people—60 per cent of all private sector jobs—and surpass the FTSE 100 in terms of combined turnover and tax contribution.
In contrast, some of Britain’s “flagship” businesses contribute little to our economy and society. In 2009 Barclays made £11.6bn pre-tax profits from its global operations, but paid just £113m in corporation tax. Our loss-making nationalised banks pay no corporation tax at all. Britain’s banks are amongst the biggest businesses headquartered here, yet Adair Turner, the chairman of the Financial Services Authority, stated in these very pages, that many of the banks’ activities over the previous ten years had been “socially useless.”
He was right—the banks were engaged not in wealth creation, but wealth extraction, recklessly misusing customers’ money to maximise their own wealth. The result was chronic instability in the British financial sector. In contrast, the massive growth of small business has no downsides. It creates jobs and boosts tax revenues without causing financial instability or widening the gap between rich and poor.
The problem is not confined to banking. Senior executive and boardroom pay has outstripped share price and profit performance over the last few decades. These problems are described by economists as “rent-seeking behaviour”—using monopoly positions to extract wealth. Under this definition Britain has become a rentier state.
A number of political leaders have said the solution lies in more assertive shareholder action. This claim has been made every decade for the last half century, and has never had any impact whatsoever.
Very few chief executives have been removed by shareholder revolt. When they are removed, it is usually down to something serious like breaching debt covenants, at which point the company’s creditors—who have the real power—may take action.
By focusing our attention on helping big business we are stifling employment-generating, wealth-creating, taxpaying, growth-spurring small businesses. To save western capitalism we need to move away from a “national champion” model, and towards a “local champion” model.
In banking, we need a high street with 30 major banks, not five. Not only will this drive down costs and offer the consumer more choice, it would make the sector more stable, ending the “too big to fail” phenomenon and protecting the taxpayer from having to fund multi-billion pound bailouts.
When it comes to relations with the press, every communication with the media by ministers and their representatives should be a matter of record, transcribed and published, say, a year later. No more cosy deals between people who should be impartial critics of each other.
But the problem that afflicts the financial and media sectors is just a visible version of a problem that dominates Whitehall’s whole mindset. It doesn’t matter which department you choose. Their approach is too often dominated by the concerns of big business. The Ministry of Defence’s disastrous record in public procurement is partly a product of an overly cosy relationship with a few suppliers. The Department of Energy and Climate Change’s clumsy environmental policies stem from close contacts with half a dozen enormous companies, unlike in Germany, whose cheaper and more effective environmental policy is dominated by local initiatives. Wherever you look in Whitehall the government is too close to big business and has been for decades.
If it is not addressed, Britain’s crony capitalism will inflict huge damage to our interests, economy, industry and society. The gap between achievement and reward will widen. Social mobility will continue to fall. It will also continue to stifle growing businesses, destabilise our banking sector, and poison our politics. It is not an easy problem to solve, but the government can lead the way by showing it is not afraid of a little competition.
It is fashionable to declare that the western model of capitalism has failed. Some laud the success of China, but that stems from state capitalism which rests on an average wage one tenth of that in Britain. Others admire the chaotic capitalism of India, but it succeeds for the same reasons. The differences are not always that clear cut; within western capitalism there is a wide spectrum of societies. A recent report by the OECD, the international economic body, showed social mobility in Britain and the US was far lower than in Australia, Canada and Scandinavian countries.
In Britain, the symptoms of western capitalism’s sickness—rocketing executive pay, bankers’ bonuses, shameless tax avoidance and cosy relations between politicians, press barons and business leaders—have become known as “crony capitalism.” Since the term was coined, coalition and opposition leaders have battled to be seen to lead the fight against crony capitalism and all that it entails. But when it comes to crony capitalism, government is often not the solution, but part of the problem.
In September last year it was announced by the Department for Business, Innovation and Skills that the bosses of Britain’s 50 biggest companies would be assigned ministerial “buddies,” to give them a hotline to discuss their concerns. The aim? To boost investment and kick-start the economic recovery. But many will see this as proof the government pays too much attention to big business and is too close to its top executives. Where is the hotline for small business leaders?
Then there are the revelations that Her Majesty’s Revenue and Customs (HMRC) has allowed some of the world’s biggest companies to pay far less tax than they owe. Companies that have allegedly benefited from HMRC’s generosity have been investigated by the Public Accounts Committee following reports in the media and dismay among the public.
Worse still, small businesses this year face new fines of hundreds of pounds for filing their tax returns late, even if they have paid every penny they owe. This is the network state in action, a place where contacts count and what you do matters less than who you know. What better illustration is there than the knighthood given to Fred Goodwin, the former chief executive of Royal Bank of Scotland, who was stripped of his title on 31st January?
Hard as it is to believe, he was ennobled in 2004 for “services to banking.” Under Labour, Goodwin chaired a Treasury taskforce, served on Gordon Brown’s International Business Advisory Council and was a trusted adviser to the then chancellor. Even as RBS teetered on the verge of collapse in 2009, the last government was happily signing off his multi-million pound pension, courtesy of the taxpayer. Nor is this an isolated example. At the time of the financial crash the bosses of RBS, HBOS and HSBC all had honours to their name. Between 1999 and 2006 Labour ennobled no fewer than ten bank bosses.
And this government got itself into a terrible pickle over whether the current RBS boss Stephen Hester would pocket a £1m bonus on top of an annual salary which dwarfs most people’s lifetime earnings. Eventually he rejected his bonus, but the government thinking is instructive.
Apparently the government, which owns 83 per cent of RBS, feared Hester would quit if it vetoed the bonus. So what? A business doesn’t instantly collapse if the chief executive leaves. Antonio Horta-Osorio, the chief executive of Lloyds Banking Group, recently took two months off with stress and the bank carried on. At least he had the decency to turn down a bonus this year.
After chairing the independent Future of Banking Commission I find it laughable that politicians imagine the banks are so difficult to run. If Hester did quit I doubt there would be a shortage of suitable applicants for a prestigious, £1.2m-a-year job. At a time where living standards are falling fast, handing huge bonuses to the heads of banks which owe their very existence to taxpayers should be out of the question.
The ill effects of crony capitalism in banking are not limited to undeserved honours and unjustified bonuses. Labour’s closeness to the financial sector led to it restricting competition authorities from intervening in financial services, and this played a huge role in creating and sustaining our monopolistic banking sector. Spain has 20 major banks. With the sixth largest economy in the world, it is nothing short of absurd that Britain has just five major high street banks, the same number as Belgium.
An uncompetitive high street is not just bad for consumers; it is a threat to financial stability. As we saw during the crisis, having so few major banks on the high street means that if one fails it takes the rest down, threatening the banking system. With a more competitive high street, there will be no such thing as “too big to fail.”
Crony capitalism has also characterised political leaders’ relationships with the press. Prior to the phone hacking scandal, the shameless courting of Rupert Murdoch and other media moguls by politicians was no less unedifying for being standard practice. That cosiness went far beyond exclusive interviews and off the record briefings. Tony Blair is godfather to Rupert Murdoch’s daughter Grace. Gordon Brown and his wife Sarah hosted a pyjama party at Chequers attended by the former News of the World editor Rebekah Brooks and Rupert Murdoch’s wife Wendi.
Throughout their time in power, calls to tighten press competition laws were repeatedly kicked into the long grass by a Labour leadership that was anxious not to offend News International. Of course this is not just a Labour problem. David Cameron has accepted in parliament that he got too close to newspaper proprietors after becoming leader. It is arguable that the Leveson inquiry should be looking as much at the behaviour of political leaders as at the behaviour of newspaper editors.
This problem is worse in Britain than it is in many western countries partly because, after a century in which our social mobility was the envy of the world, we have turned into a stratified state, where the opportunities for the poor have largely evaporated. Social mobility provided the moral justification for much of the inequality in Britain. It did not matter if people were unequal, if it reflected their contribution to society and everybody had a decent chance at the big rewards. With Sutton Trust studies demonstrating that all the professions are now dominated by the products of public schools, that is patently no longer true.
***
So how do we tackle crony capitalism? If the western model is to succeed we must rediscover the kind of competitive attitude American antitrust campaigners demonstrated in the middle of the 20th century. In the 1940s these men spoke of the “curse of bigness”—a recognition of how vast businesses which dominate and distort the market can be an industrial and social menace. Yet this did not stop America becoming the world’s only superpower. As one senator put it, “if we will not endure a king as a political power we should not endure a king over the production, transportation and sale of any of the necessities of life.”
Without this competitive spirit, western capitalism is socially and economically fragile. To solve this problem, we need to reduce the concentration of power and wealth dramatically.
In business, we need to drop the idea that biggest is best, and that Britain’s economic health is well served by focusing ministerial attention on a few dozen multinational corporations. After all, today’s business giants are not necessarily tomorrow’s successes. Many companies that became household names in years gone by—Northern Rock, Thomas Cook, Taylor Wimpey and dozens of others—have since fallen out of the FTSE 100 altogether.
As businesses grow too large it inevitably creates a damaging dehumanising effect. In days gone by bank managers would develop strong ties with (and knowledge of) local businesses. When banks instead began to focus on international expansion and trading financial instruments, these local relationships disappeared. Decisions on bread-and-butter banking issues, like business loans, started to be assessed centrally using standardised mathematical formulae, and small businesses suffered. Of course this dehumanising effect does not just apply to banks. Today many large companies trade only online, avoiding personal contact with their customers. With some companies now it would take a private detective to find a contact telephone number.
Most importantly, though, Britain’s small and medium-sized businesses are too economically important to be ignored. Together they account for 99.9 per cent of British enterprises, employ over 20m people—60 per cent of all private sector jobs—and surpass the FTSE 100 in terms of combined turnover and tax contribution.
In contrast, some of Britain’s “flagship” businesses contribute little to our economy and society. In 2009 Barclays made £11.6bn pre-tax profits from its global operations, but paid just £113m in corporation tax. Our loss-making nationalised banks pay no corporation tax at all. Britain’s banks are amongst the biggest businesses headquartered here, yet Adair Turner, the chairman of the Financial Services Authority, stated in these very pages, that many of the banks’ activities over the previous ten years had been “socially useless.”
He was right—the banks were engaged not in wealth creation, but wealth extraction, recklessly misusing customers’ money to maximise their own wealth. The result was chronic instability in the British financial sector. In contrast, the massive growth of small business has no downsides. It creates jobs and boosts tax revenues without causing financial instability or widening the gap between rich and poor.
The problem is not confined to banking. Senior executive and boardroom pay has outstripped share price and profit performance over the last few decades. These problems are described by economists as “rent-seeking behaviour”—using monopoly positions to extract wealth. Under this definition Britain has become a rentier state.
A number of political leaders have said the solution lies in more assertive shareholder action. This claim has been made every decade for the last half century, and has never had any impact whatsoever.
Very few chief executives have been removed by shareholder revolt. When they are removed, it is usually down to something serious like breaching debt covenants, at which point the company’s creditors—who have the real power—may take action.
By focusing our attention on helping big business we are stifling employment-generating, wealth-creating, taxpaying, growth-spurring small businesses. To save western capitalism we need to move away from a “national champion” model, and towards a “local champion” model.
In banking, we need a high street with 30 major banks, not five. Not only will this drive down costs and offer the consumer more choice, it would make the sector more stable, ending the “too big to fail” phenomenon and protecting the taxpayer from having to fund multi-billion pound bailouts.
When it comes to relations with the press, every communication with the media by ministers and their representatives should be a matter of record, transcribed and published, say, a year later. No more cosy deals between people who should be impartial critics of each other.
But the problem that afflicts the financial and media sectors is just a visible version of a problem that dominates Whitehall’s whole mindset. It doesn’t matter which department you choose. Their approach is too often dominated by the concerns of big business. The Ministry of Defence’s disastrous record in public procurement is partly a product of an overly cosy relationship with a few suppliers. The Department of Energy and Climate Change’s clumsy environmental policies stem from close contacts with half a dozen enormous companies, unlike in Germany, whose cheaper and more effective environmental policy is dominated by local initiatives. Wherever you look in Whitehall the government is too close to big business and has been for decades.
If it is not addressed, Britain’s crony capitalism will inflict huge damage to our interests, economy, industry and society. The gap between achievement and reward will widen. Social mobility will continue to fall. It will also continue to stifle growing businesses, destabilise our banking sector, and poison our politics. It is not an easy problem to solve, but the government can lead the way by showing it is not afraid of a little competition.
