Fabian Policy Report

FABIAN POLICY REPORT

IN IT TOGETHER

Labour’s new relationship with business, by Robert Tinker and Ed Wallis The Portman Group is the social responsibility body for alcohol producers in the UK. Its role is to regulate the promotion and packaging of alcoholic drinks sold or marketed in the UK, to challenge and encourage the industry to market its products responsibly and to show leadership on best practice in alcohol social responsibility through the actions of member companies.

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The Fabian Society would like to thank the Portman Group Acknowledgements iii for supporting this project. The research has involved extensive consultation with Summary 2 a wide group of experts and professionals. In particular we Introduction: Labour’s charter for business 5 would like to thank the following for their contributions: Ed Ainsworth, Jessica Asato, Andrew Burke, Andrew Carter, 1 Clarity of vision 10 John Clarke, Nita Clarke, David Coats, Dan Corry, Ciaran 2 Trust and relationships 15 Driver, Rowenna Davis, Fiona Ferguson, Maurice Glasman, Victoria Groulef, Tim Hames, Alastair Harper, Lee Hopley, 3 Incentives to change 19 Will Hutton, Peter Kellner, Peter Kenway, Marc Kidson, An- Conclusion: risk and reward 24 drew Kuyk, Adam Lent, Mariana Mazzucato, Emran Mian, Rick Muir, Barry Neville, Chi Onwurah, Ben Page, Alistair References 25 Reed, Charlie Samuda, Sonia Sodha, Kitty Ussher, Stewart Wood, George Windsor, Giles Wilkes, Janet Williamson, Iain Wright. Thanks also to the Fabian Society staff for their support during this project, especially Ciara Dunne, Andrew Harrop, Anya Pearson, Marcus Roberts, Richard Speight, Daisy Srblin, Felicity Slater and Cameron Tait.

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General Secretary, Like all publications of the Fabian Andrew Harrop Society, this report represents not Deputy General Secretary, the collective views of the Society, Marcus Roberts but only the views of the individual Editorial Director, Ed Wallis writers. The responsibility of the Assistant Editor, Society is limited to approving its fabian society Anya Pearson publications as worthy of consider- 61 Petty France Report Authors Robert Tinker ation within the labour movement. London SW1H 9EU and Ed Wallis 020 7227 4900 (main) Printed by DG3, London E14 9TE First published in January 2015 020 7976 7153 (fax) business as an ally, not an enemy. Rather than seeing markets as needing regulation SUMMARY to prevent them being socially destructive, the left needs a greater focus on how they can be helped to create social good. But there are currently two major obstacles to this happening. The first is relation- here are good reasons why a new ap- goals, brought on by a stark fiscal reality ships. Simply put, business doesn’t trust Tproach to business – where concerns and the diminishing returns achieved by a Labour. The second obstacle is perverse around economic long-termism, public technocratic centralised state. Instead, so- incentives. Short-termism is entrenched in health, environmental sustainability and cial policy debate in recent years has been parts of the British economy and damaging strong local communities become integral to focused on moving ‘upstream’: preventing to our competitiveness. But maximising a profitable British business model – should harms happening in the first place, rather profit in the short term, rather than max- appeal to both the political instincts of the than going through the expensive and imising value for the long term, is often a left and to the bottom line of businesses. cumbersome process of trying to repair the rational response to the institutional incen- For business, maintaining a sustainable damage after the event. Second, the left tives which present themselves to business. supply chain, a healthy customer base, a has recognised that it too readily seeks to So a Labour government would need happy work force and a cohesive commu- do things ‘to’ people, rather than attempt- to start by making it clear that it will take nity to operate in are not just nice things ing to achieve its goals in cooperation and business to heart, not keep it at arm’s to have but fundamental to profitability in partnership. length. It then needs to focus its agenda on the long term. They are also increasingly These insights have informed a shift in working with business to make it easier to important to consumers. thinking to large swathes of public policy, do the right thing. For Labour, it speaks to the two key from anti-poverty strategy to public servic- It should do this by making, much insights from the party’s recent period in es, but have yet to be applied to the party’s as David Cameron did to the Liberal opposition. First, there has been a reckon- approach to business. A Labour govern- Democrats in May 2010, a “big, open and ing with the limits of state-led redistribu- ment is going to need all the help it can get comprehensive offer” to business on taking tion as a mechanism for achieving social to achieve its social mission and so needs office that it will seek to govern in coalition with the private sector. This partnership – an invitation to join the government of Britain – would be founded on a clear set of principles of the government’s vision for the economy. These would be enshrined in a charter outlining what business could expect of government and what government could expect of business. This report sets out some ideas to form the basis of this charter, though agreement on the specifics is not what’s most important at this stage. What matters most is for Labour to engage business in dialogue and then ‘co-produce’ a set of solutions that can achieve its vision of a more responsible capitalism. Strong relationships are crucial to the effective delivery of this agenda. Too often, current debate has been a dialogue of the deaf, with each side sceptical of each other’s motives or expertise, rather than developing the common ground which

2 / Fabian Policy Report Labour’s Charter for Business: Main terms

Our vision:

Profit and social purpose are not only compatible objectives but the conditions of a flourishing economy and a healthy society. Public health, environmental sustainability and strong local communities are integral to long-term business success, and cannot be delivered by government alone but by using partnerships between business and government.

Labour will: Business will:

• Re-establish the National Economic Committee to improve • Be less ‘transactional’ in its relationships government-business coordination. with government and revise lobbying practices. • Abolish quarterly reporting to encourage a long-term • Be as strong in publically supporting positive government value-based model of growth. measures as in condemning unwanted intervention. • See regulation as a measure of last resort and if regulation • Demonstrate commitment to responsible business is necessary, commit to engaging with the relevant sector and aim practices by setting out specific, measurable targets for to announce it with the endorsement of the companies affected. social and environmental outcomes. • Adopt a ‘no surprises’ approach to business policy and seek • Take a strong leadership role in local enterprise trusted messengers for engaging with business. partnerships (LEPs) to put business at the heart of sustainable communities. • Point out and praise businesses they wish to champion as doing the right thing, before naming and shaming. • Set long-term targets which go beyond the electoral cycle to encourage longer-term thinking, create certainty and strengthen accountability. • Undertake a review into alternative ownership forms which are more long-termist in outlook, including new legal forms of company similar to the ‘Benefit Corporation’ in America. • Only provide tax breaks and subsidies to companies who can demonstrate detailed assessment of long-term shared value creation and social and environmental impacts; or where the tax break will stimulate innovation towards the government’s social or environmental priorities.

Together we will:

• Establish new sectoral councils along the model • Revisit the Corporate Governance Code to strengthen of the Automotive Council to facilitate dialogue between the position of stakeholders in relation to shareholders. government and industry, each council co-chaired by • Live our values and demonstrate commitment to long-term a figure from government and from business. goals. Government should support and champion companies • Strengthen the role of LEPs as key drivers of the which meet the highest standards of shared value creation, while local skills agenda. business should strengthen their local community employment opportunities and ensure their supply chains are sustainable.

3 / In it Together In it Together: Labour’s new relationship with business

By Robert Tinker and Ed Wallis

4 / Fabian Policy Report spending that generated the country’s pre-crisis growth. Andy Haldane, chief INTRODUCTION economist at the Bank of England, has pointed out that the UK economy is“twin- peaked”, with the “ecstasy index” – unem- ployment, inflation and gross domestic product – suggesting sunshine, while the he financial crisis of 2008 provoked est government ever” who would create “agony index” – real wage growth, pro- Tan outbreak of soul searching about “the world’s first low carbon economy”.2 ductivity and annual real interest rates – the way we do business. Six years on from However, greening the economy quickly points to gloom.4 Harvard Business Review the collapse of Lehman Brothers, the prac- became seen as a hindrance to the real picked up a similar divergence in the US: tical outcomes from this reckoning are still business of securing economic recovery. large firms and highly skilled individuals far from clear. As the chancellor told Conservative con- are flourishing, while small business and On the one hand, there has been plenty ference in 2011: “We’re not going to save the lower skilled struggle.5 of noise, across the political spectrum and the planet by putting our country out of So the debate since 2008 may have within the business community, about business.” 3 created more heat than light and despite making capitalism fairer, better, more Many analysts now worry as to whether fertile political ground, the green shoots of responsible. We have seen civil soci- the current economic recovery is broad- a new economic model are failing to flour- ety movements emerge, large corporations based enough, relying as it does on the ish. Public attitudes work conducted by change leaderships and strategy, and same mix of financial and service sector YouGov for this project in 2013 found the government taking on a greater role in success, a housing boom and consumer public sympathetic to calls for change and shaping the direction of the economy. On the other hand, much of our post- crash reality has strengthened the old rather than unleashed the new. As Britain moves out of recession and into recovery, our economic fundamentals remain es- sentially unchanged. While intense public anger at the behaviours that precipitated the crash has led to initiatives like Blue- print for Better Business and encouraged many individual companies to act like better corporate citizens, a recent report by the Financial Times suggested that the uptick in corporate social responsibility in the early 21st century quickly subsided in the face of financial hardship.1 As one adviser on responsible business told the FT: “When the financial crisis first struck, it seemed like there was a window of opportunity for serious reflection on the wider purpose of business. But that was shortlived, and the typical reaction to recession – to achieve growth at all costs – rather took over.” Much the same process occurred in government. The Conservative party entered office on the slogan “vote Blue,

go Green”, promising to be “the green- © messycupcakes / Flickr

5 / In it Together opposed to a return to the old economic important. Divorced from this purpose, “it order, but wary of ideological excess. Peo- possesses no more social significance than ple recognised something was wrong with the orderly business of ants and bees, the Britain’s business model, with 67 per cent strutting of peacocks, or the struggles of agreeing: carnivorous animals over carrion.” 7 There are good reasons why a new ap- “Britain’s recent problems have ex- proach – where concerns around economic posed fundamental problems with the long-termism, public health, environmen- way our economic system works. The ways tal sustainability and strong local com- in which government, banks and major munities become integral to a profitable companies operate will have to change British business model – should appeal to radically before prosperity is likely to re- both the political instincts of the left and to turn to British families”. the bottom line of businesses. © Simon & His Camera / Flickr Only 15 per cent thought that “there was Our social goals need ing with the limits of state-led redistribu- nothing fundamentally wrong with Britain’s to be internalised; they tion as a mechanism for achieving social economic system. Once the present period goals, brought on by a stark fiscal reality of adjustment is over, we should be able to need to be how and why and the diminishing returns achieved by a return to steady growth and low unemploy- we do business, rather technocratic centralised state. Instead, so- ment”. But the traditional answers offered than an afterthought we cial policy debate in recent years has been by both sides of the political divide received seek to impose for reasons focused on moving ‘upstream’: preventing short shrift, with both regulation and harms happening in the first place, rather government getting out of the way equally of political conscience or than going through the expensive and unpopular.6 As YouGov’s Peter Kellner brand positioning cumbersome process of trying to repair the concluded, “most people want fundamental damage after the event. Second, the left change, but not the kind of radical change For business, as Business in the Com- has recognised that it too readily seeks to that people on the left (or, indeed, the right) munity puts it, “the prosperity of business do things ‘to’ people, rather than attempt- often demand.” and of society are tied together. One can- ing to achieve its goals in cooperation However, recent attempts to broaden not succeed without the other.” Corporate and partnership. As Jon Wilson wrote in the remit of business from a pure profit literature has argued for decades that the Fabian pamphlet Letting Go, “Labour motive have tended to fall back on the tried success is achieved by working to a ‘triple needs to abandon the bossy administrator and tested approaches. We seem to think bottom line’ – profit, people and the planet and management consultant, and become either government needs to step in and – rather than the traditional metric of profit instead a movement about collective prevent harms happening, or we need to and loss.8 Maintaining a sustainable supply decision-making and common action, care try and cajole businesses to tack on good chain, a healthy customer base, a happy not command.” 10 deeds post-hoc which are separate to their work force and a cohesive community to These insights have informed a shift current core purposes, affixing a social operate in are not just nice things to have in thinking to large swathes of public responsibility sticking plaster to the run- but fundamental to profitability in the long policy, from anti-poverty strategy to public ning sore of corporate short-termism. The term. They are also increasingly important services, but have yet to be applied to the problem with both these methods is that to consumers. When it asked,“What do you party’s approach to business. We need to they attempt to impose virtue on markets think are the two or three most important think about how we generate prosperity after the point of sale. Instead, our social things to know about a company in order in the same way, and seek to transform goals need to be internalised; they need to judge its reputation?”, in 2011 Ipsos the way we do business so that social and to be how and why we do business, rather MORI found the public twice as likely to environmental goals become integral. This than an afterthought we seek to impose say ‘honesty and integrity’ compared to a can only be achieved by government and for reasons of political conscience or brand decade ago.9 business working much more closely to- positioning. As R.H. Tawney wrote nearly For Labour, this speaks to the two key gether – rather than the name calling and a century ago, it is the function of industry insights from the party’s recent period in stick waving into which current political in service of the community that makes it opposition. First, there has been a reckon- debate seems to instinctively lapse.

6 / Fabian Policy Report Labour’s charter for business our competitiveness. But maximising profit what’s most important at this stage. What A Labour government is going to need all in the short term, rather than maximising matters most is for Labour to engage busi- the help it can get to achieve its social mis- value for the long term, is often a rational ness in dialogue and then ‘co-produce’ a set sion and so needs business as an ally, not response to the institutional incentives of solutions that can achieve its vision of a an enemy. Rather than seeing markets as which present themselves to business. more responsible capitalism. The charter needing regulation to prevent them being So a Labour government would need to below draws on a series of expert seminars socially destructive, the left needs a greater start by making it clear that it will take busi- convened by the Fabian Society between focus on how they can be helped to create ness to heart, not keep it at arm’s length. It politicians, political advisers, policy experts social good. then needs to focus its agenda on working and businesses. The project was based But there are currently two major obsta- with business to make it easier to do the around the guiding principle that rather cles to this happening. The first is relation- right thing. than simply delivering a set of policy pro- ships. Simply put, business doesn’t trust It should do this by making, much as David posals from on high, it would aim to steer Labour. While certain aspects of Labour’s Cameron did to the Liberal Democrats in May a conversation about new forms of partner- policy agenda are in and of themselves 2010, a “big, open and comprehensive offer” ship and the institutional architecture re- very ‘business friendly’ and often more to business on taking office that it will seek to quired to deliver them. In doing so we have appealing than what is on offer from the govern in coalition with the private sector. This sought to build consensus around what current government, there is an overriding partnership – an invitation to join the govern- the key barriers are to a more constructive sense of hostility from business because of ment of Britain – would be founded on a clear relationship by the protagonists on either a slew of small, seemingly scattergun an- set of principles of the government’s vision for side of the process. Strong relationships nouncements, couched in strong populist the economy. These would be enshrined in a are crucial to the effective delivery of this rhetoric. This has fermented a sense of charter outlining what business could expect agenda. Too often, current debate has been a unpredictability and led to general unease of government and what government could dialogue of the deaf, with each side sceptical from business: what – or who – is next? expect of business. of each other’s motives or expertise, rather The second obstacle is perverse incen- This report seeks to develop the basis of than developing the common ground which tives. Short-termism is entrenched in parts this charter. Some ideas are set out below, exists but is often obscured. of the British economy and damaging to though agreement on the specifics is not

Labour’s Charter for Business

WHAT?

Our Vision: Profit and social purpose are not only Our Goals: A series of measurable outcomes for shared compatible objectives but the conditions of a flourishing economy prosperity, public health, environmental sustainability and and a healthy society. Public health, environmental sustainability strong local communities. These would create certainty about and strong local communities are integral to long-term business the government’s long-term vision, so no one is left in any success, and cannot be delivered by government alone but by doubt what its aims are, and provide a starting point for using partnerships between business and government. engaging businesses in how they might be achieved. Here are four examples of the kinds of measures a government could propose:

1. Shared prosperity11 2. Public health12 • Headline outcome: Economic success isn’t success if it • Headline outcome: Increased healthy life is not shared by the whole community, which is why the next expectancy and reduced differences in healthy Labour government’s headline economic measure should life expectancy between communities. be rising median household income rather than GDP. • Measure: The government’s Public Health Outcomes • Measure: The objective should be for median household Framework develops a series of long-term public health incomes to rise by as much as possible each year, sustainably indicators which take into account health quality as well over decades. The aim should be annual rises similar to GDP as the length of life and seek greater improvements in per capita (+2 per cent). more disadvantaged communities.

7 / In it Together Labour’s Charter for Business (continued)

WHAT?

3. Environmental sustainability13 4. Strong local communities14 • Headline outcome: The greening of our economy • Headline outcome: Community cohesion and views through decarbonisation. of the local area. • Measure: The Climate Change Act introduced a • Measure: Perceptions of community and a wider cluster system of carbon budgets in order to meet the overall of ideas around the concept of ‘social capital’ are notoriously target of reducing carbon emissions by 80 per cent difficult to measure, although data from studies such as the of 1990 levels by 2050. Understanding Society/UK Household Longitudinal Study provides a basis for evaluating the success of government and business in contributing to healthy local communities.

HOW? 1. Establish trusting relationships between government and business. This could be helped by two things: ‘soft’ measures to improve messaging and institutional reform:

a) Changes in practice

Labour should: Businesses should: • Adopt a ‘no surprises’ approach to business policy. • Be less ‘transactional’ in its relationships with government Regulation should be seen as a measure of last resort and revise lobbying practices, taking the long view rather along a spectrum of intervention. If regulation is necessary, than seeking quick wins. government should commit to engaging with the relevant • Be as strong in publically supporting positive government sector and aim to announce it with the endorsement measures as in condemning unwanted intervention. of the companies affected. If politicians can’t secure this endorsement, they should explicitly say why not. • Demonstrate commitment to responsible business practices by setting out specific, measurable targets • Seek trusted messengers for engaging with business and for social and environmental outcomes. think through how their messages would be best presented. The Labour leader’s office currently has a senior figure as a • Take a strong leadership role in local enterprise partnerships Trade Union Liaison Manager – it should have a Business (LEPs) to put business at the heart of sustainable communities. Partnerships Manager of comparable stature. • Rather than naming and shaming irresponsible businesses, politicians should first point out and praise businesses they wish to champion as doing the right thing. • Set long-term targets which go beyond the electoral cycle to encourage longer-term thinking, create certainty and strengthen accountability.

b) Institutional reform

As well as providing a framework for bringing together the relevant political and business leaders and providing a forum for relationship building, an interlocking three level structure will provide the right mix between clear top-level political leadership, sectoral expertise, and local knowledge. These institutions should be broad in their remit – covering all dimensions of prosperity and good business – creating space for give and take across a wide agenda and a sense of shared endeavour.

8 / Fabian Policy Report • Re-establish the National Economic Committee The first meeting should be established with a ‘memorandum (NEC) (the ‘Economic War Council’ founded to drive the of understanding’ that the body will work in the long-term government response to the recession in 2008) on a new footing interest of the country and prioritise how public health, aimed at improving government-business coordination and environmental sustainability and community strength developing a macro-level national strategy for sustainable economic can guide sectoral economic success. growth. The NEC could focus explicitly on achieving the vision set • Use local enterprise partnerships (LEPs) to coordinate out in this charter: that profit and social purpose are the conditions ‘on the ground’ strategic business interests, coordinate skills of a flourishing economy and a healthy society. It could monitor provision, and allow the major local employers to coordinate progress on the series of measurable headline outcomes for shared back to the relevant national sector bodies. The purpose and prosperity, public health, environmental sustainability and strong goals of the LEPs should be clarified by the next government, local communities set out in the charter. emphasising the core goals of shared prosperity, public health, • Establish more forums based on the experience of the environmental sustainability and strong local communities. Automotive Council, the body which facilitates dialogue between They should then be empowered to determine for themselves government and industry about how to foster a productive business how this can best be achieved in their specific geographic area, climate for the automotive sector to flourish. We recommend the based around local cultural and economic identities. LEPs should creation where possible of sectoral councils, co-chaired by rotating go further to strengthen the relationships between the business business leaders and BIS representatives. These meetings could community and local politicians, including MPs. then report back to the National Economic Committee.

2. Both government and business conduct a full review of incentive structures to see where they can be recalibrated.

A new British business model should consider the following areas in order to promote long-term shared-value creation:

• Reporting: What we measure matters • Ownership: All of our business Government should abolish quarterly reporting requirements. The government should undertake a review into alternative Any new reporting cycle which is adopted should be complemented ownership forms which are more long-termist in outlook. by strategies to encourage a long-term value-based approach Experimentation with new legal forms of company similar to accounts of company performance which includes social and to the ‘Benefit Corporation’ in America should be encouraged. environmental goals. The government should engage business in the Businesses should embed social, environmental and process of revisiting principles of the Corporate community goals at the heart of their business plans and Governance Code to strengthen the position of operations, including KPIs, reporting mechanisms and reward stakeholders in relation to shareholders. It should structures. Companies should be required to make a statement also act on proposals to redefine fiduciary duty to of business purpose upfront in their annual reports, in a CEO encompass stewardship and commitment to stakeholders. foreword or an executive summary.

• Tax: Carrot and stick • Leadership: Walking the walk The next Labour government should look to only Both government and businesses have the opportunity to live provide tax breaks and subsidies to companies who their values and demonstrate their commitment to long-term can demonstrate detailed assessment of long-term shared goals both in how they act and the people they choose to work value creation and social and environmental impacts; or with. For example, currently Labour councils take the living where the tax break will stimulate innovation towards the wage into account when awarding procurement contracts, government’s social or environmental priorities. This would and the party has said national government should do the complement the proposals outlined in Labour’s Cox Review same. Government could go beyond this by seeking to support aimed at instilling company long-termism through the use and explicitly champion companies which meet the highest of tax incentives. standards of shared value creation.

Companies should also take the lead by strengthening their local community employment opportunities. They should also ensure their supply chains are sustainable and only use suppliers who meet the highest standards of sustainability. There are also opportunities to prioritise local suppliers.

9 / In it Together Yet while radical in terms of political economy and requiring a significant shift 1. CLARITY OF VISION in political strategy, being more ‘hands on with the market’ was not just a call to arms for the Labour left: former scions of New Labour such as James Purnell and David Sainsbury, as well as ‘Red Tory’ thinkers ith the general election less than as Stewart Wood, Ed Miliband’s closest ad- such as Jesse Norman and Phillip Blond Wa year away, the Daily Telegraph viser, wrote in the Fabian Review on the eve have advocated different versions of a new offered advice to its readers on how to of the Labour leader’s infamous ‘predators economic settlement.17 The dawn of a new “Miliband-proof” their investments in the v producers’ speech to party conference in parliament was concurrent with the dawn event of a Labour victory in May 2015.15 2011, neoliberalism had been “derailed”.16 of a new progressive consensus: ‘good The paper recommended “six funds to While most associated with the Thatch- business’ is good for business. beat ‘Red Ed’”– proof, should it have been er and Reagan governments of the 1980s, Nor was this purely a political con- required, that the caricature of the Labour Wood accepted that, under New Labour, sensus, drawing as it did much from party as fundamentally a bad thing for “too many of the tenets of neoliberal- mainstream business thinking. ‘Shared British business was alive and well. The ism – the powerlessness of national gov- value’ perspectives for example, developed message was clear: if you are interested ernments in the face of globalisation, the by Michael Porter and Mark Kramer in the in making money, a Labour government dependence on under-regulated markets Harvard Business Review, saw customer would not benefit you. and growing inequality – were accepted, and employee wellbeing, the conservation It was never meant to be this way. The willingly or otherwise. Now that we can of natural resources and the resilience of lo- core of Labour’s argument about creating see the ideology of neoliberalism for what cal communities as key to long-term profit a ‘responsible capitalism’ was that it was it is, we should see the challenge for our generation. As the former Downing Street ‘anti-business as usual, not anti-business’. party in radical and ambitious terms – to adviser Patrick Diamond put it, “the search The financial crisis had laid bare the limita- rewrite the rules that govern how Britain for a more sustainable and productive form tions of New Labour’s economic strategy; works.” of capitalism hardly represents a dramatic lurch to the left. Not surprisingly, some of the most imaginative, indeed critical thinking about the future of markets and the factors driving business success has come from the private sector.” 18 Indeed, there are a diminishing number of businesses who would now accept the view espoused by Milton Friedman that there is one and only one social responsibility of business – “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” 19 Yet Labour’s ‘business problem’ is a stubborn feature of political debate. We regularly read stories that not a single FTSE 100 CEO will back the party at the next election; that senior party figures complain of a confused message; that Labour is at war with business.20 How did we get here? Partly it is inevi-

10 / Fabian Policy Report usual’, then there are going to be some British economic success and the long-term Review makes a series of proposals to ruffled feathers amongst the people for goals needed to achieve it. This has always improve skills and create world-class ap- whom business as usual was doing rather been the case: the Director General of the prenticeships.27 Research and development nicely. But this isn’t the whole story. Labour CBI Richard Lambert argued in 2009 that investment alongside a strengthened in- has been much clearer on what it will do what business needs from government is novation and industrial strategy are at the to clamp down on bad business practices “a vision of the kind of economy we want heart of Lord Adonis’s report on “mending than to champion the good. The language to have in ten years’ time and what it’s go- the fractured economy”.28 The party is also of ‘predators v producers’ was inherently ing to take to get from here to there”. 23 proposing better funding options for small divisive, successful in setting up a political and medium-sized enterprises alongside a battle but perhaps less useful for winning The bedrock British Investment Bank.29 the war. Labour’s emerging policy agenda underpinning any What’s more, in stark contrast to the has been called ‘consumer socialism’ by rhetoric of the current government, La- some commentators,21 summed up by attempt for Labour bour also has naturally ‘business-friendly’ Miliband’s statement that “markets need to forge a productive positions on a number of crucial issues. rules”: taking on the assumption that mar- partnership with First and foremost there is Europe. As Ed kets will correct themselves and consumers the business community Miliband recently told the CBI, “I will never have the information and power to make risk British businesses, British jobs, British rational choices. This leads, inevitably, to a is ‘the vision thing’ prosperity by playing political games with more interventionist policy approach that our membership of the European Union.”30 sees government as a consumer champion. While Labour has been in opposition This tallies closely with the CBI’s own view But as Duncan O’Leary of Demos reflects, it has devoted a great deal of energy to that “being inside a reformed EU is the the question is how interventionist a describing how it intends to make the best way for the UK to secure its economic government should be. “Can government UK economy fairer. Labour’s recently future.” 31 The same goes for the party’s really cap pension charges effectively with- published One Nation Economy policy re- more positive approach to immigration. out unintended consequences? Will a cap view report begins: “How are we going to Some of the British economy’s most profit- on interest rates starve the poor of credit? build an economy that works for working able sectors – including financial and legal Can it really be practical for government to people, not just a few at the top? That has services – have been hit hard by the coali- set energy prices, even for a relatively short been one of the central questions Ed Mili- tion government’s cap on skilled worker period?” 22 band set Labour’s Policy Review over the visas; indeed the business secretary himself Ultimately, Labour’s headline policy past year … Our task is one of economic recently called for the cap to be scrapped.32 interventions have been too easy for critics reform. We must build greater fairness into Similarly, heavy-handed attempts to crack to cast as red in tooth and claw, crowding our economy rather than simply dealing down on abuse of the student visa scheme out the space in which a more construc- with the consequences of it as it stands.”24 have damaged the education sector. The tive conversation might emerge; one that Labour’s signature policy measures have IPPR found that, while the UK’s educa- reflects the many commonalities that exist been raising the minimum wage, freezing tion sector has been a growth sector and between two sides of a debate who are energy prices, reintroducing the 50p top achieved annual increases in exports, often erroneously assumed to be at log- rate of tax and curbing excessive executive international student entrants to higher gerheads. pay; Ed Miliband set out his “six national education for the 2012/13 academic year goals … a plan for the next ten years” at were broadly flat.33 The Financial Times has What business wants Labour party conference 2014.25 called the government’s student visa policy This report seeks to develop the space in What Labour has been less explicit about “an act of national self-harm that Britain which a broader, more positive story might is how it intends to make the UK economy can ill-afford”.34 be developed. The bedrock underpinning richer. In fact, the party has put forward a Here is a strong basis for a positive busi- any attempt for Labour to forge a produc- number of sensible proposals for helping ness agenda. Yet not only have these felt tive partnership with the business com- business to grow. The Armitt Review aims like less of a political priority in terms of the munity is ‘the vision thing’. to speed up Britain’s decision making Labour party’s messaging, they often feel The primary job of politics in its rela- on infrastructure, to ensure big project like technocratic add-ons to the main story. tionship with business, it emerged from decisions on transport or energy don’t get The party is missing a trick, as within the our seminars, is to set a clear direction for kicked into the long grass.26 The Husbands idea of ‘responsible capitalism’ is the idea of

11 / In it Together the economic distress of the communities BOX 1: PEPSICO on meeting its social and public health in which they produce and sell? How else PepsiCo is a food and drinks manufac- commitments and opens progress to could companies think that simply shifting turer which has made commitments on external scrutiny. For example, in the activities to locations with ever lower wages public health commitments integral to its UK, 27 health commitments established was a sustainable “solution” to competitive business performance. in 2010 are annually reported by an ex- challenges?” PepsiCo has reduced the sugar in ternal auditors. PepsiCo is committed to You can’t have a long-term, productive standard Pepsi by around 4 per cent making two-thirds of its sales by volume business without a healthy workforce, an and has incentivised the purchase of healthier according to Food Standards environmentally sustainable supply chain, sugar free Pepsi through lower prices. Agency criteria by 2015. The company and a thriving local community. These are The company has achieved significant re- also achieves widespread buy-in to these the three core parts of the social economy ductions in saturated fat and salt in food commitments, helping embed public and they must form the foundation of how products. The company reports meeting health goals and other social commit- a Labour government will help business its Responsibility Deal targets in three of ments into its model of business. Health succeed in the 21st century. the five relevant categories. and nutrition is a board level responsibil- Significantly, the company has set ity at PepsiCo. Public health: Healthy, wealthy out quantitative targets to track progress and wise It is no surprise that centre-left politics should see the creation of a healthy, balanced, sustainable growth, not just fair- that “the balance for UK business has happy citizenry as a core goal. But what ness. And pursuing both with equal vigour swung too far towards the short term: is increasingly apparent is that this must creates the opportunity for a much more pressure to deliver results in the coming be recognised as a central strategic goal subtle, symbiotic and strategic relationship year, half-year or even quarter, overwhelm- for business too. At its most crude, it is with business, built on trust and shared ing any consideration of the future.” 35 not in any businesses long-term interests endeavour. It is often said that New La- Short-termism has become an entrenched to be systematically curtailing the life bour’s ‘third way’ saw economic efficiency feature of the UK economy. The recent expectancy of its consumer base. The and social justice as mutually reinforcing troubles at Tesco – who face allegations of group Sustain note that that there are but separate entities: the market was left accounting misconduct and whose trading an estimated 70,000 premature deaths to it, the rewards of economic success were profits fell by almost half in the first half of each year in the UK as a result of an un- invested in social policy, which supplied 2013 – show the pressure on businesses to healthy diet.37 The Department of Health the workforce required for future economic perform on short-term financial indicators estimates that reducing salt intakes by 1g success. As Sir George Cox, former director at the expense of long term growth.36 would avoid 4000 preventable deaths and general of the Institute of Directors, puts it Evidence in favour of the ‘business case’ save the NHS £288 million every year. Ac- in his review of short-termism for the La- for shifting to longer-term value creation tion to address this is not just good for the bour party: “For too long UK governments strategies is compelling. Yet while the perils brand; it’s fundamental to a sustainable have concentrated their economic policies of economic short-termism are increasingly consumer base. on how to spend the nation’s income, not understood (if not acted on), we still tend The health and wellbeing of a workforce on how to generate it … much more atten- to miss the broader influences on business are also crucial to productivity. As the Mar- tion has to be given to how the nation is success. Michael Porter and Mark Kramer mot review of health inequalities states: going to generate its wealth.” In the long explain in their work on ‘shared value’, “The relationship between employment term, economic success has to mean social most businesses rely on an outdated ‘social and health is close, enduring and multi- success; or else, as Keynes put it, we’re all responsibility’ perspective, focused on dimensional. Being without work is rarely dead. Profit and social purpose are one and maximising short-term profits and viewing good for one’s health, but while ‘good work’ the same – Labour needs to find a story that social problems at the periphery of what is linked to positive health outcomes, jobs treats them as such. businesses do: that are insecure, low paid and that fail to So rather than asking whether business- “How else could companies overlook protect employees from stress and danger es are good or bad, producers or predators, the well-being of their customers, the make people ill.” 38 In spring 2014 the CIPD a better question is whether they are long depletion of natural resources vital to their reported that 41 per cent of employees or short term. The Cox Review concluded businesses, the viability of key suppliers, or reported excessive pressure at work every

12 / Fabian Policy Report day or once or twice a week. The proportion of employees that feel engaged hovers BOX 2: UNILEVER its products; sourcing 100 per cent of around 35 per cent.39 Unilever is a FTSE100 consumer goods agricultural raw material sustainably; In an era of mounting concern about company which has demonstrated the and working with at least 500,000 small- public health, it is more important than ever long-term competitive advantage of holder farmers and 75,000 small-scale to appreciate the ways in which firms can embedding a strong commitment to distributors in its supply network. generate social as well as financial value. sustainability in all aspects of its busi- The features of the plan are systemic Government’s role in regulating industry ness practice. and run throughout all of Unilever’s to prevent harms is and will always remain Unilever has led the way among more than 400 brands and across the crucial. But it needs to see industry as an ‘good businesses’ by aiming to become a whole value chain from sourcing really not an enemy and explore how market sustainable growth company. CEO Paul sources to consumer behaviour. behaviours can be harnessed to achieve Polman has abolished earnings guid- Unilever has managed to combine social goals. Businesses are often making ance in quarterly reporting, a significant ambitious pledges on sustainability this journey of their own accord as Box 1 driver of economic short-termism. In without damaging its bottom line. The shows – so politicians need to celebrate 2011 the company outlined a business company has outperformed many of its good practice and support its spreading. plan to double Unilever’s revenue and competitors during the recession, with half its environmental impact. turnover up by 10.5 per cent in 2012. As The environment: Sustainable profits Unilever’s Sustainable Living Plan Unilever CEO Paul Polman has put it: need a sustainable planet commits to ambitious sustainability “Most businesses operate and say We have reached a point where it is targets in the decade to 2020: helping how can I use society and the environ- impossible now to talk about sustainable more than one billion people improve ment to be successful? We are saying economic growth without talking about their health and wellbeing; halving the the opposite – how can we contribute environmental sustainability. In a world of environmental footprint all its products; to the society and the environment to be finite resources and rapid depletion, a sus- halving the water associated with successful?” tainable supply chain is absolutely crucial consumer use of its products; halving to long-term profitability of a business. As waste associated with the disposal of the Food Ethics Council defines it, sustainable business models are “those that are commercially successful by providing so- benefits in revolutionising their supply Strong local communities: cial value within the limits of the planet.” 40 chains and seeking competitive advantage Pride of place Porter and Kramer point out that costs in being first movers in the world that’s As Business in the Community defines it: to the environment are often costs to the coming. There remain a number of obsta- “Prosperous, strong communities are business. They highlight the example of cles to the wider adoption of these busi- good for business. By investing in commu- Wal-Mart, which cut its packaging and re- ness models. As the Food Ethics Council nities to help them tackle the issues that routed its trucks, meaning less packaging, report said, businesses “face a wide range affect them, businesses are investing in fewer journeys and $200 million in savings. of commercial and operational obstacles themselves. And it’s about understanding Unilever has cut its energy use and its in their efforts to adopt more sustainable what impact the choices you make about operating costs by $395 million since 2008; practices. For many businesses, there are running your business – who you employ, Intel announced $23 million in savings insufficient incentives to adopt such prac- where you locate, what you buy, sell and between 2001 and 2012 through energy tices, and often quite strong disincentives invest in – have on local communities and reduction. Marks and Spencer’s Plan A to do so.” Indeed in October 2012, 50 busi- the social issues that affect them.” 42 includes 100 commitments to make it the nesses and other organisations published But a dominant aspect of New La- world’s most sustainable major retailer.41 an open letter to George Osborne, calling bour’s political strategy was an uncritical And yet, these companies are often for a specific target for restricting carbon acceptance of the perceived realities of making changes in spite of the system emissions from power generation, in order the globalised economy, often to the rather than because of it. They are taking to provide companies and investors with detriment of local communities. A highly the initiative themselves because, as well long-term confidence in the direction of competitive borderless marketplace as seeking to be good corporate citizens, government policy. required a deregulated labour market, often they identify business and brand with policymakers powerless to protect an

13 / In it Together people have to lose. This is not only bad for companies’ local reputation and contributes to the current low public standing of big business, it affects the quality of the workforce that employers might draw on, the quality of local services which their employees use, and the cohesiveness of the society in which they are based. This insight has a number of consequences. First, as Mark Leonard recently wrote, it requires politicians to recognise that “although globalisation has benefited the British economy in the aggregate – it has sped up the deindustrialisation of many regions and has costs in terms of jobs and wage growth for many.” 44 Second, it requires business to remember that it hasn’t always been just about the bottom line and that “the best companies once took on broad range of roles in meeting the needs of workers, communities and supporting businesses” 45 as Porter and Kramer © Corey Seeman / Flickr remind us. “What has been missed is the employee’s current job, save for provid- practice could be superseded by rational- profound effect that location can have on ing them with the skills and training to ised administration and production, both productivity and innovation. Companies compete for finding another one when turned out to be mistaken.” 43 According to have failed to grasp the importance of the the inevitable happened and the rational Porter and Kramer, the view that business broader business environment surround- multinational company moved its opera- is an island detached from place and social ing their major operations.” tions somewhere cheaper. obligation has led to a situation whereby It is no coincidence that often when But, as Maurice Glasman put it in the Fa- the communities in which companies are we think of the most highly-regarded bian pamphlet The Great Rebalancing,“the located derive little or no benefit from British companies or industries, we think assumption that globalisation required business activity. Instead, those communi- of a place: Cadbury in Birmingham, transferrable skills and not vocational ties often “perceive that profits come at Rowntree’s in York, Bombardier in Derby, speciality, and that tradition and local their expense”: for business to win, the the car manufactures of the Midlands, the potters of Stoke. Our identities are bound up in the places we live. Whereas capital BOX 3: GRIFFON HOVERWORK, value creation over the long term. Grif- flies round the world in the blink of an eye, SOUTHAMPTON fon’s apprentices include engineers, most people – around 60 per cent – don’t Griffon Hoverwork is a medium-sized electricians, designers and welders. All settle more than 20 miles from the place enterprise based in Southampton which of Griffon’s apprentices are recruited they lived when they were 14.46 Industries designs and manufactures hovercraft. through City College Southampton to intimately reflect the natural resources at The sector faces a number of skills support the local labour market. hand and the particular relationships of a gaps, leading to staff turnover and Griffon’s turnover has increased by region. For businesses to be successful in an increasing reliance on short-term around £20bn in three years and has the long term, making a commitment to a agency contracts. In the face of this, enjoyed success in selling to overseas place and its people is crucial. Griffon has adopted strategic use of markets. The company has won awards around 20 apprentices aged 17 to 28, for its contribution to the local commu- promoting longevity, productivity and nity in Southampton.47

14 / Fabian Policy Report a mainstream current in British politics. It 2. TRUST AND RELATIONSHIPS states that an economy: “capable of creating the wealth needed to sustain an improving quality of life … requires a joint partnership between business, government and our wider society. overnment and business are inter- This interdependence is by no means Success in meeting demand in any sector Gdependent. The markets in which one-way, however. Today it would be im- or market requires a combination of the business activity takes place are socially possible for governments to progress their right business responses and the right embedded, subtly shaped by networks and social, environmental or economic aims public policy.”49 politics, laws, taxes and the institutions without the co-operation and participation of the public sphere. At a more practical of a healthy and profitable business com- These observations are now advanced level, business rely on social goods such munity. From the firm level upwards, the by the likes of Andrew Adonis and Michael as a well-skilled workforce trained for the private sector matters. Businesses rely on Heseltine.50 Yet far from a spirit of common needs of the 21st century economy. And good government and vice versa. purpose and shared endeavour, today the when the workforce is seen to fall short Responses to the banking crisis in 2008 relationship between politics and business of this standard, the businesses commu- have acknowledged that when govern- is too often one of scarcely concealed nity turns to the state for answers: a recent ment and business work together effec- antipathy. More than five years since the study by the CBI found “too many young tively, they are much more than the sum of crisis, business continues to be viewed with people are still leaving school without the their parts. Five years after its publication, distrust. Rightly or wrongly, as the financial core of literacy and numeracy they need to the former Labour administration’s policy crisis fed through into the real economy, be successful in life and work.” 48 framework New Industry, New Jobs reflects many businesses were left looking devoid of social purpose. As growth ebbed, many felt that the compact between business and its various communities had been severed in the interests of short-term profit and shareholder value. Many individual businesses do not see themselves as having been complicit in a culture of predatory capitalism prior to 2008. Nevertheless, in 2012 ‘business leaders’ still polled as one of the least trusted audiences in Ipsos MORI’s Veracity Index. Over half of respondents in a survey agreed with the statement than ‘British businesses are more focused on short-term profits than looking after their customers’ long term needs’.51 More recent work un- covered persisting discontent. Only half of respondents in a 2014 YouGov poll thought business made a positive contribution to society and the CBI has recently launched ‘The Great Business Debate’, a national / Flickr campaign aimed at restoring this faith.52 The low public standing of business has been seen as an electoral open goal by many politicians, though its longer-term Max Korolev

15 / In it Together

with an unpopular sector may provide The political and business communities or disincentives, before restricting choice a polling bump on specific issues while often find themselves at odds in Britain. or eliminating it entirely.54 simultaneously undermining crucial meas- But research such as the literature on ‘va- Currently, there is a sense that Labour ures of economic competence and making rieties of capitalism’ suggests that this is a reaches for regulation by default. To change partnership working in government more function of path dependency rather than this impression, Labour could make clear challenging. the fundamentals of Britain’s economy. that regulation is part of a wider spectrum But political short termism runs deeper Broadly speaking, firms can adopt strate- of measures. If it is required in certain cir- than the instinct to give big business the gies based on strong coordination and cumstances, the rationale should be clearly occasional kicking. As Stewart Wood information-sharing on one hand, or a explained. has argued, the relative strength of the more liberal, competition-focused ap- Good examples of the efficacy of dif- executive in the UK’s parliamentary system proach on the other. Historically Britain’s ferent approaches can be found in Labour runs against the grain of the long-term corporate culture has displayed character- party policy on low pay. The minimum coordination needed to sustain effective istics of the second approach. But politi- wage was a controversial statutory change government-business partnerships: “Be- cians should not be fatalistic about the that would affect all businesses. Many cause governments have the capacity to direction of Britain’s political economy, businesses were very unhappy about this introduce radical changes of policy at will, as this research shows some of the things prospect initially, but following an exten- companies are unwilling to make risky that government can do to make strategic sive period of preparatory academic work, long-term investments”.53 Where power partnership working between the busi- political argument and consultation, the is more constitutionally limited – like ness community and itself easier to adopt. Institute for Government notes: “By 1997, the US – or in more coordinated market the national minimum wage had become economies – like Germany – there is Low levels a relatively non-controversial proposition greater inherent certainty. The policy shifts of trust in business and the Confederation of British Industry characteristic of Westminster law-making (CBI) was prepared to lend its support.”55 undermine the stability and commitment and government have This was regulation, but people knew it was which allows government and industry in not yet strengthened the coming and were involved in its implemen- other countries to plan. resolve to work together tation, with the level was set through social in partnership partnership in the Low Pay Commission. A new approach By contrast, the party has not indicated Low levels of trust in business and gov- it will legislate to enforce the living wage ernment have not yet strengthened the Establishing trusting relationships be- in the next parliament. This is due to fears resolve to work together in partnership. tween government and business could be over its impact on jobs and to preserve the In this climate of mutual distrust, British helped by two things. The first is changes grassroots, civil society support through politics faces a difficult situation. We sorely in practice. Labour desperately needs which the campaign originated.56 Here, need a new political economy which gives to change the mood music regarding compulsion is not appropriate but govern- equal regard to generating wealth and business, and this requires softer, more ment can use other levers, such as informa- distributing it more widely. Yet a culture in symbolic measures. tion, example and incentives. which government and business are co- For example, while there will always be In effect, Labour should aim for a ‘no creators of this vision is undermined by a place for regulation, it should be seen surprises’ policy: there will be regulation, a deep-seated ‘British disease’ of political only as the very hard end of a range of but it will sit at the end of a spectrum of and economic short termism. measures. There could be a lesson here measures, that will be used only in certain In the absence of dialogue, construc- from the ‘ladder of intervention’, devel- clearly defined circumstances. If regulation tive negotiation is often substituted oped by the Nuffield Council on Bioeth- is necessary it will be designed in partner- for the sorts of reckonings which have ics, which assesses how proportionate ship with the relevant sector. A Labour characterised this parliament. While a particular public health intervention government should be able to announce a the ultimatums found in speeches can might be. The more intrusive the measure, policy with the endorsement of the com- generate a morning’s headlines, they are the greater the justification required. panies affected; if politicians can’t secure often too high stakes to encourage mature Measures range from monitoring the cur- this endorsement, they should explicitly reflection about the shared problems fac- rent situation and providing information, say why not. ing society. through guiding choice using incentives

16 / Fabian Policy Report The second thing needed to embed the last Labour government in 2009 and The successful working of the Automo- longevity into the business-political part- maintained by Vince Cable, has formalised tive Council throughout the economic nership is an architecture – in other words, the spirit of mature collaboration based on crisis has helped contribute to the renais- an institutional structure – which facilitates a shared vision of success in the automo- sance of automotive manufacturing in Brit- dialogue, trust and mutual commitment. tive sector. Trade unions are represented on ain. As Nita Clarke, who was Tony Blair’s This would need to begin from a consensus the Automotive Council, making them an assistant political secretary in Downing over the long-term priorities set out in the important site of employee voice. Routine Street, writes: previous chapter, and the responsibilities opportunities for workforce-employer of government and business in achieving engagement should feature prominently in “The automotive industry was just one them. And high-trust partnerships can any future partnerships. sector where joint agreements on short time then work together to design coherent working, pay freezes, part-time working, economic incentives which support the What we need is the extended holidays, sabbaticals and so on aim of sustainable long-term economic right mix between clear saw companies over the worse. It is no ac- growth. cident that those sectors with mature and There are sector-level precedents which top-level leadership; effective relationships between trade un- contain lessons for this new architecture. sectoral expertise; and ions and companies, such as the chemical The Automotive Council, established by local knowledge industry, managed their way through and are coming out strongly at the other end.”57

Production in the British car industry is now up by more than 50 per cent, nearly 130,000 people have skilled jobs and more than £10bn a year is generated for the economy.58 As Mike Wright, executive director at Jaguar Land Rover, told the BBC’s Newsnight programme, the partnership and dialogue facilitated by the Automotive Council has been crucial to encouraging investment: “The relationship between government and industry through the Automotive Council means that we’ve got a forum where the industry specific issues can be tackled strategically so that we’ve got a pathway together.” Councils on this model have the added virtue of facilitating feedback to government on how policy is working ‘on the ground’ and acting as a conduit for the views of many firms. In his review of the competen- cies of the Department for Business, In- novation and Skills, Andrew Adonis noted the frustration of many business leaders that government does not appreciate the practical reality of implementing policies or what the world of business is like. What we need is the right mix between clear top-level leadership; sectoral expertise; and local knowledge. This suggests a

17 / In it Together clear leadership, establish trusting relation- and strong local communities set out Yet as both reviews point out, there ships and enable local flourishing: in the charter. remain significant problems with 1. Re-establish the National Economic LEPs: they are often geographically Committee (NEC), the ‘Economic 2. Establish more forums based on haphazard and lack a clear remit, co- War Council’ founded to drive the the experience of the Automotive herent membership and consistent government response to the recession Council. As detailed above, the funding. The purpose and goals of in 2008. This had a wide and senior council has become an influential the LEPs should be clarified by the membership of all the key ‘economic’ forum for decision-making thanks next government, emphasising the departments (Treasury, BIS, DWP) as in part to high-level ministerial core goals of shared prosperity, public well as other relevant departments buy-in from the Secretary of State for health, environmental sustainability (DECC, DEFRA, DCLG) and key Business, Innovation and Skills. and strong local communities. They expert business ministers. Dan Corry, Importantly, however, the council is should then be empowered to deter- who was senior economic adviser to not government-led but co-chaired mine for themselves how this can best the prime minster at the time and who by BIS and industry representatives. be achieved in their specific geographic chaired weekly supporting meetings of We recommend that where appropriate area, based around local cultural and special advisers, says: “The NEC was more councils should be established in economic identities. We support the in any terms a success. It did join up key strategic industrial sectors. In order Adonis Review’s recommendations that departments. It speeded up decision to capture the spirit of partnership of LEPs should be geographically ration- making and delivery. It did give col- the Automotive Council’s work, we alised and membership should be rep- lective buy-in to positions. Officials suggest that these councils are also resentative of the regional business, ed- liked it and so did most ministers similarly co-chaired by industry ac- ucation and employment community. (especially those normally frozen out tors and representatives from BIS. of economic policy discussions).” 59 These sector councils would report But LEPs should go further to back to the National Economic Com- strengthen the relationships betwe- There is potential for a ‘peacetime’ mittee. To kickstart the process, the en the business community and local NEC to provide the top-level govern- inaugural meetings of each council politicians. While LEPs should have ment coordination currently lacking should devoted to establishing a strong relationships with the local and allow the government’s clear ‘memorandum of understanding’ of authority, local MPs are an important strategic vision to be implemented the terms of partnership by which the part of the conversation and their role across departments. As Jill Rutter of bodies will function and a declaration should be considered too, especially in the Institute for Government writes, of the long-term aims to which the sustaining dialogue between national the NEC shows “the potential for council is working. government, businesses and the local breaking down silos through an community. activist secretariat, a strong prime 3. Use local enterprise partnerships ministerial push and a very senior (LEPs) to coordinate ‘on the ground’ collective underpinning. More col- strategic business interests, organise lective government is possible.”60 skills provision, and allow the major local employers to coordinate back to The NEC could focus explicitly on the relevant national sector bodies. creating certainty and achieving As the Adonis Growth Review has the vision set out in our proposed said, LEPs are “the regional voice of charter for business: that profit and business”. Labour has accepted that social purpose are the conditions of LEPs are here to stay and a review a flourishing economy and a healthy by John Healey MP and Les Newby society. It could monitor progress on for the Smith Institute concluded the series of measurable headline that “after a somewhat chaotic start outcomes for shared prosperity, public … LEPs have become more es- health, environmental sustainability tablished and important bodies.”

18 / Fabian Policy Report that structure the economy. This approach would recognise that often, rather than 3. INCENTIVES TO CHANGE being a reflection of the rapacious, mean- spirited and selfish nature of business, short-termism is simply a rational response to the institutional arrangements corporate leaders are presented with. Regulation will here is an increasing awareness that the planet confers an obligation to work in always be needed to provide a backstop Ttraditional business practices are partnership with government to co-create and define the rules of the game, and in reaching their social, environmental and a solution. certain sectors more regulation will be economic limits. Mental health, particularly This report has made clear two impor- needed than in others. But this should workplace stress, is a growing problem tant preconditions for this spirit of partner- always be coupled with a commitment to on which traditional policy interventions ship to work. First, government must set consult and seek advice from the business struggle to get a handle; the once invis- a clear direction for the economy and the community, and an understanding that ible environmental externalities associated conditions for future business success. Sec- regulation sits at the hard end of a scale with ‘business as usual’ are beginning to ond, behavioural and institutional changes of intervention and other mechanisms will manifest themselves in potentially ruinous are required to foster a culture and climate often be more effective routes to success. ways; and a short-termist, low-investment of mature government-business dialogue. At this point it would be traditional for a business culture has created entrenched With the ‘big picture’ clarified and trusting think tank report to set out a series of rec- economic imbalances which could threaten relationships established, government ommendations for the changes the system recovery from recession. Businesses are and businesses would be able to work in requires to achieve greater long-termism. not singularly responsible, of course. But partnership to align incentives which write That would seem somewhat counter to the their inescapable impact on society and long-termism into the very institutions spirit of this project, which has sought to

BOX 4: THE PARADOX OF SHORT- the company as “a transactional island in operate.” However, in 1991, its mission TERMISM which you are as good as your last deal, was redefined following its acquisition A strong body of evidence shows the ir- as farsighted as the next deal”. Treating by the UK conglomerate Hanson: now it rationality of short termism, or what one reputation, intangible value, relationships sought to increase shareholder profit. author has referred to as the ‘paradox of and people as ‘disposable’ can damage Since this moment, ICI has been a profit’.61 The underlying philosophy of the long-term success of companies as it story of decline. The share price peaked shareholder value holds that the primary “extinguishes any sense of commitment in 1998, soon after the new strategy was purpose of a company is to maximise – of investors to companies, of executives announced. After two successive divi- value for the benefit of external share- to employees, of employees to firms, of dend cuts, the company was ejected in holders who have invested capital and firms to their investors, of firms to com- early 2003 from the FTSE 100 index, Kay are its ultimate owners. munities, or of this generation to any writes: “The transition from industrial The theoretical strength of the princi- subsequent or past one.” giant to mid-cap corporation had taken ple follows from the fact that sharehold- The paradox is illustrated in a well- only 12 years”.62 There are some parallels ers financially expose themselves to the known example cited by the economist between Kay’s analysis and the business performance of a company they do not John Kay of the pharmaceuticals com- literature on companies that make the control. However, in practice the evidence pany ICI. In 1987, ICI’s purpose was “the transition from being ‘good to great’. tells against the short-term pursuit of responsible application of chemistry” Great businesses do one thing to a very shareholder value as a driver of corporate and this was how it saw its path to suc- high level, with consistency, commitment performance. In the words of Professor cess. It set out to “enhance the wealth and discipline. Companies that do not Colin Mayer of Saïd Business School, a and well-being of our shareholders, our make the transition from good to great strict interpretation of the principle of employees, our customers and the com- often do many things with little consist- shareholder value encourages a view of munities which we serve and in which we ency that they may achieve profit in. 63

19 / In it Together convene a conversation and foster a spirit of partnership between politics and business. So drawing on our seminars, con- versations and an extensive programme of research, here we suggest some areas where realignment might be needed and some of the things that government and business can do to achieve it. These are intended to form the basis of a charter that Labour can develop in the months before the next election and then use to make its ‘big, open and comprehensive offer’ to business on taking office.

A new British business model Reporting: What we measure matters ‘Business as usual’ is deeply rooted not just because of market norms and expectations. It is also because of prevailing incentives which make it rational to devalue the future and focus on the bottom line above all else. How ‘success’ is understood within the business community and how official regulation says it should be measured casts a long shadow over attempts to foster long-termism among politicians and © Winniepix / Flickr business. Simply put, ‘what gets measured, The systemic pressures to continue gets done’. And the metrics by which busi- When short termism measuring success by reference to short- ness success is currently measured do not prevails, non-financial term earnings fluctuations is considerable. provide an accurate reflection of long-term Survey evidence collected by the High Pay corporate health. values take a back Centre in 2011 shows that “three-quarters Short-term earnings indicators are a seat when they should (78 per cent) of executives would give up case in point. At the end of each financial be integral to a long-term economic value in favour of quarter, companies present an earnings definition of success meeting the current quarter’s earnings report to investors containing profit consensus”. While the EU Transparency information. The obligation for publicly Directive in November 2013 abolished listed companies to account for their per- ‘Quarterly capitalism’, as the corporate the requirement for public companies to formance is necessary, but the truncated behaviours which this process incentivises publish quarterly interim management length of the reporting cycle imposes a are known, does not take account of the statements, a recent poll of Britain’s 350 barrier on the time horizons over which stewardship of assets over years, but biggest companies in summer 2014 found corporate planning takes place and erodes rewards transactional relationships over a that most companies will continue to do so the incentives to take a long-term view. matter of months. Short-termism also be- because of market norms and pressure.65 It can encourage hyperactive or tactical gets short-termism. As Tomorrow’s Com- There is an analogy with the difficulty investment strategies aimed at boosting pany note, the impatience associated with governments have faced in breaking the short-term performance rather than the a pressure to report corporate performance grip of Gross Domestic Product (GDP) gradual accumulation of social and eco- on a quarterly cycle strengthens incentives measures as an indicator of national nomic value. to focus on monetary representations of economic performance. GDP is poorly cor- value because of their perceived objectivity related with living standards. In the 2000s and accuracy.64 the UK enjoyed strong economic growth,

20 / Fabian Policy Report but between 2003 and 2008 median wages ‘balanced scorecard’ approaches, which more holistic accounts of company perfor- stagnated. Between 2002–03 and 2007–08 aim to provide a more balanced view of mance. The next government should work there was not a single year where real organizational performance by comple- with bodies such as the Financial Reporting median household income increased by menting financial performance metrics Council to build consensus around the use more than 1 per cent.66 Nevertheless, the with non-financial indicators. of non-financial metrics in the reporting pressure on governments to orientate When short termism prevails, non- process, such as measures of pay ratios, the their economic policies towards boosting financial values take a back seat when they living wage, and carbon emissions. national output figures is immense. should be integral to a definition of success. Here the government can learn much The lesson is that what is easily observed The Labour party has made the welcome from the growth of integrated reporting is not always what creates value in the commitment to abolish quarterly reporting and the balanced scorecard approach.69 widest sense possible. As the organisation requirements if elected in 2015.68 But as This process presents a more comprehen- Integrated Reporting note, non-financial well as the timeframe over which reporting sive picture of corporate success by draw- performance can be indicators of financial happens, short termism is a product of the ing out the interdependencies between performance over the long-term.67 Instead, indicators used to measure performance. economic, human and natural capital in different types of value are created over For this reason Labour’s commitment to corporate strategy; the company engage- different time horizons and through dif- create a new reporting cycle should be ment to stakeholders and shareholders; ferent channels. The thinking is rooted in accompanied by strategies to encourage and company performance over the long term. In a recent survey of over 1,300 CEOs, PwC found that over 70 per cent agreed with the statement that “measuring and reporting our total (non-financial) impacts contributes to our long-term success”.70 The aim of this process should be for government to engage business in the process of redeveloping the UK’s Cor- porate Governance Code, the set of legal principles which act as a guide to company decision making, which organisations including the Institute of Chartered Ac- countants in England and Wales (ICAEW) have called for.71 UK corporate governance fundamentally affects the way in which organisations are run. In the UK, corporate governance arrangements entail a stronger mandate than in other countries for the directors of companies to represent the interests of its shareholders. The principle underlying these arrangements, sometimes called ‘shareholder value’, is laced with disincentives which undervalue the social, environmental and economic future to which businesses contribute. But businesses should not wait to be forced by government to change their practices; indeed many business have moved already to embed social and environmental outcomes into their performance and remuneration criteria. The last government

21 / In it Together formance Indicators (KPIs) which tried to to exclude the latter. Second, it would aid its profits. This legal structure hardwires a make it easier for companies to measure, government-business partnerships by set of aims wider than financial value into manage and communicate their envi- establishing a shared values base or com- the life of the company. ronmental performance.72 In total these mon ground from which cooperation and The government should also act on comprised 22 individual KPIs, of which negotiation could begin. proposals to redefine fiduciary duty to companies were expected to adopt around encompass stewardship and commitment five of the most relevant. They range across So companies should to stakeholders. This would involve revisit- emissions, resource use, supply chains and embed social, environmental ing principles of the Corporate Govern- products, and could form the basis of a set ance Code to strengthen the position of of environmental KPIs for Labour’s busi- and community goals at the stakeholders in relation to shareholders. ness charter. heart of their business plans The TUC have recommended amending Mark’s and Spencer’s Plan A is an exam- and operations, including the duties of directors as set out in the ple of linking performance assessment and KPIs, reporting mechanisms Companies Act to reflect the sovereignty reward to long-term sustainability targets. of acting in good faith to promote the According to Which?, this “sets out a series and reward structures long-term success of the company, making of specific, measurable commitments, serving shareholders and stakeholders a including a number on food and nutrition. sub-section of this primary mission.74 There is clear responsibility for monitoring Ownership: All of our business Another proposal which has gained progress in meeting these promises, annual The government should undertake a increasing approval is having employees sit updates are published and the company review into alternative ownership forms on company boards, a corporate governance says it will link progress on Plan A to bo- which are more long-termist in outlook. model used in Germany and elsewhere in nuses for the management board.”73 A number of studies have shown how Europe. Employee involvement in company So companies should embed social, employee-ownership models and mutuals decision making is typically referred to in environmental and community goals find it easier to adopt strategies in which the debate over corporate remuneration, at the heart of their business plans and long-termism and sustainability are inte- and it has an important role in this respect. 75 operations, including KPIs, reporting gral to the value creation process. An ex- However, employees can also offer insights mechanisms and reward structures. pansion of non-PLCs would contribute to into corporate strategy which traditional We also support the recommendation of the development of a longer-term culture board level perspectives often struggle to the Ownership Commission in 2012 that based on profit-making rather than profit- observe. This is consistent with research companies be required to make a state- maximising. As William Davies has argued: which finds that motivation among staff ment of business purpose in their annual and a culture of openness to ideas is the key reports. It would be important that this was “Being organised and owned differently, contributing factor to workplace innovation, not buried in a footnote or an appendix; a without the constant threat of investors not ‘heroic’ leaders. 76 bullet point in a subsection on page 57: it exiting, engagement with staff and other should be front and centre, in an executive stakeholders can become the primary focus Tax: Carrot and stick summary or in the CEO’s statement, to give of management, rather than the add-on once Tax is a fraught area for the Labour party top level accountability and articulate the shareholders have been satisfied. And to the and the threat of confiscatory taxation is values which guide decision making at the extent that relationships are more enduring one that, for many, the party is strongly firm level. Compliance with this statement and reliable, then more tacit knowledge and associated with. One of the most important would represent a performance indicator in intangible business value can be shared, ways governments have sought to signal the reporting process and directors should both inside and outside the firm.” their pro-business intentions has been in outline a statement of the long-term direc- the area of personal taxation. New Labour’s tion of travel towards realising this aim. Experimentation with new legal forms commitment not to raise the top rate of tax A statement of business purpose would of company similar to the ‘Benefit Corpo- was seen as crucial to signalling that it was serve multiple functions. First, it would ration’ in America should be encouraged. on the side of wealth creation. The current help company directors keep two time Benefit Corporations have an explicit social Labour leadership has used tax to signal frames in mind – the requirement to be or public purpose and are under fiduci- a preference for small and medium sized profitable in the short term and sustainable ary duty to report on the public, social or enterprises, with the party’s policy review in the long term, alleviating the pressure environmental value created in addition to stating, “Labour will not go ahead with

22 / Fabian Policy Report Leadership: Walking the walk Both government and businesses have the opportunity to live their values and demonstrate their commitment to long-term goals by the way they act themselves and the people they work with. A good example of this is the living wage. Currently Labour councils take the living wage into account when awarding procurement contracts, and the party has said national government should do the same. Government could go beyond this by seeking to support and explicitly champion companies which meet the highest standards of shared value creation. As the example of Griffon Hoverwork demonstrated, companies could make choices which prioritise strengthening employment opportunities in their local community, in this example by using local apprentices rather than agency workers. Companies should also ensure their supply chains are sustainable and only use suppliers who meet the highest standards of sustainability. There are also opportunities © Christopher Smith / Flickr to prioritise local suppliers. The chair of the the Tories’ additional corporation tax cut executive remuneration should be paid in CBI Construction Council recently urged for large businesses and will cut and then the form of deferred shares, to weaken the companies to “think local”, as part of the freeze business rates for small and medium incentives to hyperactive market behaviour CBI’s Great Business Debate: “Construc- sized businesses instead.” and discourage exit, as proposed by the tion firms need to buy materials, as well as As the Cox Review states, “taxation – or Kay Review. 78 often needing to sub-contract work out. If exemption from taxation – is a powerful We support the proposals outlined in those firms make it a priority to purchase tool for incentivising behaviour.”77 So it the Cox Review aimed at instilling com- and employ locally wherever possible – to is important that tax is intelligent and tax pany long-termism through the use of tax buy those materials from local suppliers, incentives are used to encourage more incentives: for example, reducing in steps and sub-contract primarily to local firms – businesses to adopt enlightened business the tax levied on dividend income/gain on the benefits of a particular building project strategies based on investment, training, the sale of shares dependent on the length in a small … region can be immense.”79 committed relationships with employees of time held; tapering Capital Gains Tax on There is a strong business case for support- and government and monitoring their shares in steps from 50 per cent in year one ing local procurement, simplifying supply environmental responsibilities. Blunt regu- down to 10 after a decade. However, the chains, reducing logistical costs and, as lation can encourage instrumental business next Labour government should only pro- the Co-operative Group research recently behaviours and work against the spirit of vide tax breaks and subsidies to companies found, it has strong consumer appeal too. 80 authentic industry partnerships this report who can demonstrate detailed assessment is aimed at. of long-term shared value creating and The next government should link social and environmental impacts. This executive remuneration with long-term would complement the proposals outlined company performance: profit optimisa- in the Cox Review aimed at instilling com- tion; environmental sustainability; and pany long-termism through the use of tax community engagement. A proportion of incentives.

23 / In it Together made in the aftermath of the crash, revert to type and perhaps permanently fracture CONCLUSION: RISK AND REWARD trust with a public who have been prom- ised ‘better business’. Recent years have witnessed an endemic collapse in the relationship between elites and the public – political parties, the press, the police, big ike the New Labour governments af- alike as a radical agenda, yet this report has business – so we are at a febrile moment Lter 1997, the Labour party’s work since shown how much common ground exists where any retreat could have disastrous leaving office in 2010 has been defined by between the politicians who wish to see the consequences both for the UK’s long- its relationship with business. But whereas development of a more responsible capital- term economic health and for political the party before it went to great lengths to ism and the businesses who are often al- disengagement. How many junctures and appear avowedly ‘pro business’ and assure ready doing it. The opportunity is there to watersheds can we go through without the private sector of its light touch inten- build on the common ground that already people noticing any difference when we tions – the so-called ‘prawn cocktail of- exists, and this should be the mission of the come out the other side? If political and fensive’ – in opposition Labour has sought next Labour government. It can do this by business elites can’t work together to de- to outline an alternative vision. outlining a clear vision for economic suc- velop a sustainable economic model that This vision is no less supportive of cess, establishing the trusting relationships generates prosperity everyone can share in, business in principle, but seeks to set a necessary to achieve that vision, and then people will rightly lose faith in the ability new direction for the private sector. At the working with businesses to make doing the of public institutions to offer solutions to core of the argument is the insight that right thing also the easy thing. the big challenges we face. The public want government itself must adopt a new role But we risk missing the moment, with change, but don’t believe either businesses and relationship with business in order to the shutters closing on the window of or politicians will deliver it. It’s up to both move Britain’s economy onto a new path. opportunity for change. There is a growing sides to work together to prove themselves This has tended to be presented in politi- risk that, as trend growth returns to the worthy once again of people’s trust. cal debates by proponents and opponents UK economy, companies forget promises © Andrew Mowbray / Flickr

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80. 90% per cent of shoppers wanted supermarkets to sell more food from British farms, for example. See, Voinea, A. Co-operative Food supports UK farmers with £1.5bn investment, Cooperative News (08.12.2014) www.thenews.coop/92364/news/agri- culture/co-operative-food-supports- uk-farmers-with-1-5bn-investment

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