What are we to make of Labour’s new report entitled Financing Investment? As it happens, the report came out on the same day as I joined Professor John Kay, Sir Anthony Seldon and others at a PARC Trinity House event to discuss ‘Productivity – what is the problem and how to fix it?’
First, let’s welcome any political move that puts wealth creation at the heart of policy.
And Labour has recognised that improving investment in manufacturing and ICT are important.
But there’s a bigger picture.
There is no policy lever that a government – or a central bank – can pull which will improve productivity.
Improved productivity will only come from a combination of circumstances and contributions, only some of which government can influence.
The vital lifeblood is entrepreneurship. People starting businesses, growing businesses, having the confidence to try new things and challenge old methods.
Businesses are created by entrepreneurs. Government can destroy entrepreneurship with red tape or by constant changes to policy and incentives (as happened when it suddenly withdrew subsidies to encourage green investment, or did yet another zig zag on the role of Regional Development Agencies and Sector Skills Council to Local Enterprise Partnerships) but it cannot on its own create enterprise.
On the positive side, it can help entrepreneurship. It can create enabling conditions for enterprise to flourish.
Education reform could be an enabler. As Antony Seldon argued in an impassioned speech to today’s conference; the narrow focus on content knowledge and passing exams is a disabler. Government can help to free up education. It can help it balance its focus on examinations and knowledge with a necessary development of skills and aptitudes. That would mean an abandonment of the disastrously narrow OFSTED school assessments. Or at least the development of measures that assess schools in part by their success in building the confidence, the capability and the self-awareness of the individuals they are developing, and not merely grading their quality as exam fodder.
Secondly, there is the life cycle of companies. What happens when the entrepreneur has grown a business to a turnover of £30m or £100m and wants an exit, to take out at least some of the capital gain? Or what happens to a much larger company? How much of the creativity and productive capacity will stay in the UK to benefit the UK? On my recent journey home from Singapore I met an entrepreneur who had built a business supplying equipment to aerospace companies. He had sold his business to two of his long term shareholders but he knew of three other companies in the sector which had been sold to Chinese companies. His view of their reasons for buying was clear. They wanted the knowhow, they wanted the intellectual capital but they would be long term employers in the UK.
If the Bank or the government want to create the conditions for long term wealth creation, they need to develop a policy which makes more choices available and attractive to the entrepreneur who sells. There is overwhelming evidence that the worst things for productivity is when a company does an IPO and becomes listed. That way lies quarterly reporting, pressure for share buybacks, all the distractions of governance obligations, the threat of takeover and the temptation for executives to ‘sweat the assets’ while growing the bonuses. It is no coincidence that Britain’s most successful entrepreneurs are so negative about listed status. Sir David McMurtry, creator of Renishaw, wishes that he had never listed. James Dyson says that he would never list. In the USA investment by quoted companies is half that of unquoted.
Meanwhile the government also needs to develop an array of policies that tackle this short termism in companies that are already listed. And it also needs to change the incentives in the Private Equity Sector, so that it no longer enjoys the privileged tax treatment of debt, unless it operates on longer time horizons.
In short, we want a government that favours stewardship capitalism and discourages extractive capitalism.
We debated the difficulty involved in measuring productivity. ‘Productivity is the measure of our ignorance’ said john Kay. He showed us a list of UK industries ranked by productivity. At the top of the list was electricity generation. At the bottom, health care. Why? Not because health care was necessarily unproductive. On the contrary. We just don’t know how to measure its added value. I agreed, adding that in future we should be measuring productivity net of externalities. Delivering more goods in central London by diesel vehicle should not be counted as an improvement in productivity. It is this reassessment of progress and prosperity that Tomorrow’s Company is now tackling under the leadership of my successor, Norman Pickavance.
That does not mean that it is unimportant to measure productivity. It is hard to see us paying for better education or NHS or transport systems if we don’t grow our wealth creating effectiveness.
No-one can explain why the French are on conventional measures so much better at improving productivity than we are. Why has our productivity growth hit a plateau since around 2005?
My own speculation, supported by the presentation of Nita Clarke of the Involvement and Participation Association, is that it comes back to company-level explanations. Who is going to go the extra mile working for a leader you don’t believe in insider a company whose purpose is uninspiring? And how are we going to get the best commitment from people who know that they are seen primarily as costs to be cut, not assets to be cherished?
There are great examples of leadership all around us, young and old, as referred to in The Courage of Their Convictions. Atom Bank and Greenlight Pharmacy and Simply Business among the young disruptors. Tata, TTP and the John Lewis Partnership among the established companies.
One day we might hope to have a government that truly puts the encouragement of long term and sustainable wealth creation by companies like this as the heart of its strategy. Government could also encourage stewardship characteristics in an investment community that offers savers the opportunity to invest in companies. If we work in this direction we are sure to have a more productive economy, however we measure it. And a happier population. Nita Clarke told us that the distinguished public health expert Dame Carole Black had told her that the greatest possible change that could enhance public health would be the emergence of multiple employers who made people feel engaged in their work.