Opinion

Labour's view of corporate governance – a work of fantasy?

11 min read

21 November 2019

As part of its election campaign the Labour Party recently published “Rewriting the Rules: Labour’s vision for corporate governance, accountability and regulation”. Nigh on every paragraph, sends the reader into a world of delusion.

What were they smoking when they wrote it? Come with me as I unearth some of the gems. Be warned you may want to fix yourself a stiff drink before proceeding.

69 words in and we have “the relentless pursuit of shareholder value …… has also meant the rise of monopolistic behaviour and the subversion of government’s ability to regulate the economy in the public interest”.

Yes, well any current monopolistic behaviour will pale into insignificance by the time Labour has nationalised vast swathes of industry but that irony has been conveniently overlooked here.

It then airily goes onto claim the government can’t do anything about monopolies.

I wonder what the formidable Andrew Tyrie at the Competition and Markets Authority has to say about that.

” We are learning that an extractive economy cannot sit forever alongside democratic politics. One or the other must prevail”.

What in God’s name does that mean?

This is in the ‘Executive Summary’…

Nowhere later is it explained though the word “democracy” is sprayed around the place when the authors can’t think of anything else to throw in.

“ All in all, it is well past time for the rules of the game for business in the United Kingdom to be rewritten – not least to protect good businesses that play by the rules and act responsibly from being undercut by unscrupulous competitors”.

Ah yes, bring on the bogeymen.

They’re ‘anti’ short term

Where are these unscrupulous competitors and if they exist what is Labour going to do about them?

Silence on all fronts:

“A short-term focus (or short-termism) is embedded within the shareholder-centric model prevalent in large companies in the UK.

The pressures to maximise returns to shareholders, many of whom are short-term investors, at all costs have persuaded executives to boost dividends and other forms of shareholders’ returns.

This is often at the expense of long-term investment, skills, new products, care for customers, the environment and decent wages for employees”.

This is full of non- sequiturs.

If most investors are only there for the short term why would company boards bother paying any attention to them?

Companies that denude their businesses of too much cash will rapidly fail and be replaced by others that are better managed- nature abhors a vacuum and doesn’t need or require a bunch of socialists to interfere.

A quest to amend company law

“Labour has already committed to amending company law so that directors owe a duty to promote the success of the company for the benefit not only of shareholders but of employees, customers, the environment and the wider public.”

And how is company law going to judge/ measure the success of the company in the eyes of customers, the environment and the wider public?

This is meaningless twaddle and could never be adjudicated over in a court of law. As part of its ideas on Board structures, Labour puts forward:

A two-tier board involves an executive board, responsible for the day-to-day operations, and a supervisory/stakeholder board that guides and monitors that executive board.

The supervisory or stakeholder board is made up of stakeholders (such as customers, employees, and long-term shareholders).

It will be essential to ensure that the supervisory/stakeholder board does not become a body merely to be consulted, with inferior power. The supervisory/stakeholder board should have overall power to steer the strategic direction of the company”.

Executives have less power

So the customers, employees and shareholders are going to tell the executives what to do. Good luck with that. A recipe for a useless talking shop if ever there was one.

The next part of the Oeuvre deals with what is now described as “Inclusive Ownership Funds”.

This is the already much-documented theft of 10% of shareholders equity to be re-channelled into the employees’ pockets. Enough has already been said about this Marxist move but I would just observe that at a time when equity investing is on the wane, confiscating further equity from investors is just plain daft.

“Businesses will hardly be able to remain viable in a world of catastrophic climate collapse”.

Crikey is Labour calling on the services of disaster movie stars Dennis Quaid and Jake Gyllenhaal?

Nope, step forward the London Stock Exchange.

A draconian ‘green agenda’

Under Labour, companies will be delisted from the London Stock Exchange where “they are not taking adequate steps to tackle the climate emergency”.

And what might those be?

What about only allowing members of 2-tier Boards to walk from their homes to Board Meetings? That would also help with the NHS obesity crisis.

The next section deals with executive pay.

As I warned way back in a City Grump of September 2013,  absurd rates of executive pay will be a fertile hunting ground for the socialists, and so it has proved.

Yet they cannot resist jumping to the wrong conclusions.

A fantasist problem?

Hence we have, “companies that believe that to attract and retain the best global talent they must offer competitive pay packets and view it as an investment in the company’s future. However, this investment could instead be made in the workforce or new plant and machinery – all of which are vital to the ultimate success of any company.”

No one but a fantasist will believe that if you cut executive pay then that money will wing its way to adding more employees or plant and machinery.

Then we come to “we will also move towards a 20:1 pay ratio between lowest and highest-paid employees in companies bidding for public sector contracts”.

As night follows day such a restriction will mean that only the most slovenly and inefficient companies will want to take on government business as dynamic ones won’t want to be tied into a State incomes policy.

Share options do not escape the wrath of Labour either.

If share options are to be offered to executives for any reason, they must also be offered to all employees on the same terms in quantity and price,” – oh dear, bye, bye share options!

The accountancy firms are next

The accountancy firms are next up for the chop and here Labour largely confines itself to a lot of the usual about conflicts of interest and the need to split off the audit arms of the big four but of course, it can’t resist the opportunity of creating another Kafkaesque piece of state bureaucracy.

“Labour will establish a new statutory body to conduct audits. Its purpose will be to conduct real-time audits of banks, building societies, credit unions, insurers and major investment firms”.

Staffing up such a beast and getting the hapless lads and lassie to audit in “real-time” should prove endless amusement for those looking in on such.

An attack on our regulators

The final flourish is reserved for an attack on our regulators with, surprise, surprise, the FCA taking most of the brickbats. Again this should be relatively easy pickings given all the financial misdemeanours of the last decade or two.

And what’s the socialist solution? Commissariats.

Try getting your head around the following:

“Labour will legislate to establish a Business Commission. We will set up the Companies Commission, Finance Commission, and Enforcement Commission, along with an associated ombudsman and supporting staff.

A streamlined design for the Business Commission – with the right delineation of responsibilities for the Companies Commission, Finance Commission, and Enforcement Commission – can help to close the gaps in regulation and establish and more robust and independent regulatory system.

Further work will need to be done to define the scope of the Companies, Finance, and Enforcement Commissions. The Business Commission should integrate the accounting, auditing, insolvency, and financial sector regulators.

The Companies Commission will have responsibility for auditing, accounting, and insolvency. The Enforcement Commission could have a regional presence”.

I call rubbish!

The opening line of that Word War 1 song comes to mind, “One staff officer jumped right over another staff officer’s back, and another staff officer jumped right over that other staff officers’ back.”

No one is suggesting corporate governance in our country is perfect. By the way, it certainly isn’t in Germany, often cited in this document as a paragon of virtue, where corporate scandals abound and are growing all the time.

But this missive from the Corbyn/McDonnell axis deserves to be called out for the rubbish it is.