It may have been nine years ago, but the financial crisis continues to throw its long shadow over Britain. Last week, RBS, at the time of the crisis the world’s biggest bank, announced another stunning loss of £7bn – so chalking up cumulatively some £58bn of losses since 2008.
It is now even clearer than it was at the time that had the government not stepped in, taking a vast £45bn stake, RBS would have gone bust, threatening a more widespread banking panic with cascading consequences hard to contain. At the very least, Britain would have had an even deeper recession – and much slower recovery. At worst, there would have been a full-scale depression.
In one way, £45bn has rarely been better spent; but, in another, a clutch of hard questions that would have been asked if the bank had gone bust were avoided. How could it be that RBS’s managers and shareholders could ever have allowed it to grow so large when so much of what it was doing was not just valueless, but actively value destroying? Why was the wider financial and regulatory ecosystem of which RBS was a part not more alert to what was going on, and instead, to an extent, egging the bank on? What system could permit a business horror story with such near-calamitous results; and even so was part of an inequitable capitalism that helped trigger the resentments contributing to Brexit?
For RBS is not alone in losing its way so badly. Too many great names in British business have revealed feet of clay in the past few years. Rolls-Royce has paid £671m in penalties to the UK, US and Brazilian governments to settle bribery and corruption claims in 12 countries. Tesco had to take huge writedowns over scarcely credible, large-scale accounting irregularities. British banks have paid more than £53bn in fines for misconduct, notably in the mis-selling of personal protection insurance policies, over the past 15 years. Then there are the never-ending accounting and contractual irregularities that plague the public outsourcing industry, from Serco to G4S.
It is not only a British phenomenon – Germany’s Volkswagen remains at the heart of a swirling scandal in tricking regulators over the emissions of its diesel engines. But, as global investment managers will acknowledge, British companies seem disproportionately caught out by serious irregularities in accounting. But then British companies, largely because of the way their fragmented shareholder base interacts with the stock market and the injunctions of British company law, are uniquely under pressure to provide good short-term financial results.
There was a collective sigh of relief last week when, after just 48 hours, Kraft Heinz withdrew its opportunistic £115bn bid for Unilever – a company that has consistently taken a long-term view in building an environmentally sustainable business. But if Unilever is to stay independent and protect its values, it is going to have to apply to itself – even if more judiciously – the flint-eyed treatment that Kraft Heinz would have administered. Loyal shareholders, if they are to stay loyal, are going to have to be rewarded quickly and generously. Last week, post the bid, Unilever announced it would do just that.
People at large know these issues are fundamental, but business and finance seem distant, difficult-to-understand worlds over which nobody, let alone governments, seem to have much leverage. If you hold with a Corbyn-type philosophy, it is proof positive that the only solution to today’s capitalism is socialist transformation – but it is a view few share. The 20th-century experience of attempted socialist transformations is hardly encouraging. In any case, if you have regular contact with senior business executives, what is impressive is their enthusiasm to build businesses and create value rather than a hunger to exploit their workforce and cut corners.
The trouble is that too often it does not come out that way: they are prisoners of a business ecosystem over which they too feel they have little leverage – plunged into a dog eat dog world in which honest-to-Ggod business building is rarely the priority.
What has to change is the architecture in which British companies operate, so that it gives better expression for the best of business intent. Nor is this just of corporate interest. Britain’s indifferent record in innovation and investment, its poor productivity and even the inequalities of income between regions – among the worst in the industrialised world – are linked umbilically to the way much business is compelled to behave. To its credit, the May government, publishing green papers on corporate governance and industrial strategy in quick succession, recognises this truth. The difficulty is to identify what should follow.
Queue Big Innovation’s Purposeful Company Task Force, set up 20 months ago, with the aim of plugging the gap (full declaration: I co-chair it). Having marshalled the evidence last spring which proves that companies which put their purpose before profit outperform companies that do not, tomorrow it releases its policy report. The report’s innovation is to think systemically across how company law, financial reporting, executive pay, the investment management industry, shareholding structures and financial flows could all be reformed in a way that cumulatively represents a new settlement for British capitalism.
Better still, the recommendations build on many current initiatives whose general direction in a statement of core beliefs is supported by a cross-section of companies, investment houses and advisory firms.
For the first time in my career, there is an alignment between a critical mass of business which recognises the system in which it operates needs to be re-engineered, a government that agrees, and a set of recommendations that could be implemented. Change could happen. Purposeful companies could be built.
It is a watershed moment. When the task force was launched, we hoped it would make a difference, but addressing these questions was a minority sport. Not today, with Brexit looming – and beyond it the digital revolution and environmental and demographic challenges. Britain has needed a different capitalism for decades, but it has taken the reality of leaving the EU to drive the point home. Perhaps, just perhaps, it might happen – a silver lining in otherwise very dark clouds.
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