Two years on from the election of Teresa May, the same old business debates are recycled in the UK. The gap between the pay of directors and employees continues to grow. Productivity remains flat. Investment in research and development is disappointing. The quality of apprenticeships is unsatisfactory. Not to mention Brexit and its effect on supply chains, recruitment, and the City.
News bulletins tell us daily whether the FTSE 100 is up or down, as if this were a meaningful barometer of the health of our businesses. But is this really where the debate needs to be if we are concerned about the future of business?
For a deeper assessment of the wealth creating state of our nation, I would turn instead to a man called Tom Brown, now retired and living back in his native Yorkshire.
I feel a natural affinity to Tom. We both went from Oxbridge to jobs in manufacturing. He had a background in physics as well as politics, philosophy and economics and had soon equipped himself to becoming a CEO. I started in HR, and apart from running a small plant in the paper industry, I spent most of my managerial career in the functions that supported the CEO, including raw materials handling, distribution and logistics, sales and marketing, customer service, quality management, and culture change.
But we lived through the same era. We both experienced the bygone age of shop steward power and management weakness that was then swept away by the Thatcherite medicine of recession and reform. And then we watched the aftermath with dismay. We hoped to see a revival of British manufacturing based on high standards of training and long-term investment, and a new sharing of rewards and influence with the workforce. Instead we saw the City of London emerge from Big Bang as a place where companies were traded rather than stewarded, and the attention was given to industrial pirates like Hanson rather than companies that grew through innovation, design and investment in plant and people. ‘Shareholder value’ became a religion even though the main beneficiaries were not the ultimate shareholders but smart intermediaries – analysts and fund managers. The share price was accorded an almost mystical faith. Countervailing arguments for sustainability and continuity of relationships had an uphill struggle
Tom’s book, Tragedy and Challenge, is an account of his own experience as a CEO in three quoted companies, and a chairman of seven quoted and eight unquoted businesses. He started life in GKN and, having been given a good management education by them, had a formative experience working in the Southern Tyrol in an environment where training and investment were truly valued, and the owners and unions both encouraged a focus on long term growth.
Tom is the sort of leader who would get alongside the people who worked in the organisation, so that they trusted him and opened up to him, and so that, together, they built strong companies. He has little time for the majority of asset managers he met who didn’t understand and, it would seem, didn’t want to understand the real opportunities and threats to the business.
His take on productivity gives a good sense of where this all leads.
‘Unfortunately, UK engineering has suffered severely from the ‘apple orchard’ theory of productivity. A farmer has an orchard with one hundred apple trees and measures productivity as the number of apples produced by each tree. He cuts down the twenty least productive trees. His orchard’s productivity soars! It’s just unfortunate that he has fewer apples to sell, and less jobs for pickers! And sadly, this has been exactly what has been happening in engineering, with companies being closed rather than modernised’.
Brown warns that we are steadily approaching a serious balance of payments crisis, one that Brexit is likely to accelerate. We have starved our engineering and knowledge intensive businesses of capital and continuity. Manufacturing is inherently the most productive sector and an economy with a bigger manufacturing sector will be the most productive overall. By contrast the UK’s dominant service sector has relatively low productivity. His recipe for success in such businesses is an international strategy; focus on what you are best at and continuously deepen your knowledge and competitive advantage there; long-termism of approach; innovation the technology of product and process; balance sheet prudence; and stay away from being a quoted company.
He argues that what the state needs to do is:
- Improve apprenticeships and end exploitative employment practices
- Raise the minimum wage so that jobs are better valued and companies better incentivised to invest in new equipment
- introduce a German-style system whereby employers are subsidised to retain labour, albeit at reduced levels of pay, in a recession, so that the bank of skill s is not diminished.
- Provide 100% allowance against tax for year 1 of capital investment
I would personally add one point to this list:
- create mechanisms by which companies that want to pay extra to their executives are also required to channel extra into trusts that hold shares on behalf of employees. And follow a stewardship agenda that, at every turn, closes the gap between citizens and shareholders.
As a Yorkshireman Tom Brown finds the economic and social and cultural divide between north and south shocking. He describes conversations with London-based head-hunters who tell him as company chairman that there is no point in their seeking a CEO for his business unless it relocated its HQ to London. And the child of a London based visitor to his family who says ‘Look Daddy they even have Shell petrol stations here’! He warns that Brexit will make this gap worse. He develops this point in a recent Yorkshire Post interview.
What an irony. That the greed and short-termism that emanated from London has created this national divide. That this divide has generated the hostility and sense of exclusion that has motivated Brexit. And that Brexit now threatens to make the problem worse, especially for those a long way from London!
As we pick our way through the rubble of Brexit, it is likely that old parties will split and new forces emerge. Whoever comes out on top will need a clear agenda for tackling economic slowdown and the balance of payments deficit. In the end they will recognise that they need to prioritise long term wealth creation by companies. That will be the moment to give them Tom Brown’s book.