London, 14/11/2006
Those of you who knew Aneurin Bevan can probably guess his likely reaction to my choice of the title tonight.
Capitalism was capitalism to Nye. It was enduring and unchanging. It was the South Wales coalowners, it was the slave traders, Cecil Rhodes and other rapacious exploiters of working people in the Empire and at home. It was greed and selfishness, the drive for money dominating and twisting all other human motivations. Bevan was often a lot more sophisticated then he might have be at a NUM weekend school giving the above speech. He appreciated the good things of life in full measure - even having at least a touch of what the French call ‘un socialiste caviar'.
But I don't think he would have taken easily to a concept of the new capitalism. Many things do remain the same but my thesis tonight is that capitalism has changed in very important ways and that the Left generally has few intellectual, philosophical or political answers, at least as yet. It therefore warrants the use of “new” and the formulation of a new strategy to deal with it. My purpose tonight is to encourage others to pursue these questions.
Since the collapse of communism under its own internal contradictions, capital has the whole world, more or less, at its feet. It can go most places seeking the best returns. It is afraid of nothing - there is no competing system which threatens its expropriation. This struck home to me vividly when Bill Clinton visited Vietnam towards the end of his Presidency. You won the war observed Clinton wryly but, now, to survive, you are observing the rules of world capitalism.
There is still protectionism in many parts of the world. I was interested last week to see that even in the open economy of Sweden, the Wallenberg family and its foundations, which act as a holding company for several of the big Swedish multinational companies, are being accused of protecting Scania, the truck manufacturer against a German takeover. Not everyone is allowing the new capitalism a clear run but the pressures are on.
You can see it in rising levels of inequality. If you work in the global economy, especially in its financial sectors, rather than manufacturing, chances are you are doing well. Exceptionally well, if you are at executive level.
On the other hand, the new workshop of the world is China and it is being followed by other developing countries with inexhaustible supplies of cheap labour - and access to capital. The impact on some sectors of the UK economy like textiles and footwear has been devastating.
Most of all, you can see it in the operation of financial markets. Since the 1980s, changes in regulation and technological developments have led to huge changes in the way financial markets work, the role of banks, and the rise of new investment forms. The City view is that this trend is almost wholly beneficial, moving financial markets closer to the ‘perfect competition' and optimal outcomes. At most there is concern about two issues: illegal activity (fraud etc) and possible systemic risk. However, recent developments point to a whole series of concerns, including accounting scandals: the cases of WorldCom, Enron and others have shown that market mechanisms combined with existing auditing rules and regulation are inadequate to protect investors, workers and pensioners against the risk of fraud. This is new rootless capitalism without any geographical responsibilities, as shown for example, by HSBC hinting, threatening, that it might relocate its headquarters outside the UK.
Stock options are also a concern. One increasingly popular method to align shareholder and managerial interests has been for the former to grant the latter stock options. This has created huge incentives for managers to pump up stock prices. This encourages short-term thinking on the part of managers. Costly, long-term investment projects (including R+D) are likely to come under increasing pressure to produce fast results or be abandoned.
Pressure from pension funds is also a recent phenomenum. The general pensions crisis plus the increasingly market-driven pension system in a number of countries (competition to generate higher returns) is increasing the ‘activism' of pension fund managers. They are increasingly investing in riskier assets (notably hedge funds). They are increasing the demand for returns made from investments in productive companies, depriving the latter of resources, and are restructuring their portfolios more frequently, reducing firms' certainty with regard to future funding. (On average investment funds hold stakes in German companies for less than 2 years). Many of us with pensions are also shareholders and we should worry that pensions are getting shakier as this new capitalism, which is supposed to act for us, grows in strength.
Private equity funds are also a big concern: Their most damaging strategy (asset stripping) is to buy up companies whose share price has, for whatever reason, fallen below the value of its assets. The latter are sold off at a profit. Fund managers grow rich while (good) jobs are lost and established companies (with consensual industrial relations systems) are destroyed. In other cases firms are bought up and then ‘restructured', before being sold off at a profit. The wider economic impact of such practices depends, of course, on the nature of the restructuring carried out. The German bathroom equipment producer Grohe is an example of a successful company systematically run down by successive takeovers. There are many British examples. What is certainly the case is that PEF involvement is almost always highly leveraged. In other words the buy-out is debt financed: the purchased firm becomes responsible for servicing these debts. Woe betide Manchester United if it ceases to be able to attract full houses at Old Trafford.
The consequent drive for higher returns inevitably exerts downward pressure on wages and conditions. Even where jobs are not lost, private equity owners are perceived to be less interested in the longer-run and more technical issues of the particular branch of production, and much readier to challenge existing norms, procedures and structures, especially those relating to workers, unions, and works councils. That in turn threatens workers' commitment to the company for which they work, their willingness to invest in firm-specific skills etc. Not much scope for partnership working there.
Costly defensive strategies are also of concern. The potential damage from hedge funds is not limited to actual takeovers; the pressure to avoid hostile takeovers forces incumbent management to take actions that bolster the firm's share price in the short run (including postponing investment, making workers redundant) with damaging effects on the longer-term performance of the company. It cannot be easy running a firm doing difficult things when you are up for sale every day and every night of every year.
Banking finance is changing. In many European countries banks with close links to ‘their' industrial companies have traditionally been the main channel of external finance. In addition, in some, publicly owned (and various forms of cooperative) bank were important. This model was characteristic, in particular, of Germany, Austria and other successful economies into the 1980s (at that time it was widely held in the English-speaking countries to be a superior system to our Anglo-Saxon model).
However, more recently these countries have moved towards a greater role for stock markets (equity finance) on Anglo-Saxon lines, reflecting, not least, the perceived, recent superior performance of these economies. This breakdown of close bank-company relations has caused major problems, especially in Germany where small and medium enterprise in particular have faced a credit crunch. The existence of public banks - criticised by the orthodoxy for alleged inefficient capital allocation - also enabled broader regional development aims to be pursued and inter-company linkages to be taken into account in lending decisions. In addition such lending is much less pro-cyclical and, last not least, government guarantees effectively reduced the cost of capital. Yet the pressure is on to wipe out public-sector banking in Europe.
I plead guilty to being one of those who underestimated the impact of the changes. Some of you will remember that when I became General Secretary of the TUC in 1993, I put promoting workplace partnership at the centre of the TUC's programme for the future. I did not fully appreciate what was happening on the other side of the table. Indeed until my daughter's boyfriend got a job with a hedge fund, I did not appreciate fully what a hedge fund did. After his explanation my first question to him was “Joe, is it legal?”
The concept of partnership with capital was not one Bevan would have warmed to - and plenty of other trade unionists feel the same way. To them, partnership is class collaboration, sleeping with the enemy. To others, if partnership was just at workplace level and not in the strategic commanding heights of the economy, it was an unequal partnership. “Like one man and his dog” sniffed one critic.
But my motivation was rooted in experience of the successful post war reconstruction process in many European countries, underpinned by partnership between unions and employers. Sometimes it led to effective incomes policies with wider collective bargaining agendas than the UK. Often it had produced more successful, higher productivity companies in sectors where our companies were failing.
I was also struck on my many visits to British workplaces by how much shop stewards and workers wanted their companies to be successful; and not just because the penalties of failure were evident in the high levels of bankruptcy and unemployment which characterised the 1980s and early 1990s. They wanted to be proud of what they did, of the successes they had achieved. Few just recited a list of problems and grievances.
So partnership deals, based on mutual respect, with high productivity swapped for commitments to train workers and maintain employment, or at least avoid compulsory redundancy, were our cause.
It was not original: earlier advocates had included Bill Jordan, John Edmonds, and, I suppose, Eric Hammond, although his no strike clauses did much to discredit the term partnership.
As many of you know, the TUC set up the Partnership Institute, the Labour Government followed with the Partnership Fund and various others like the IPA continue to spread the word.
But my question now is - partnership with who? And what has been happening on the management side?
Some partnership companies have thrived. Tesco and Barclays Bank have prospered and attribute some of that to their improved industrial relations arising from partnership deals.
Others have disappeared, tragically Rover whose “New Deal” was an early pioneer of partnership agreements. Many others have been absorbed into multi-national companies with worldwide reach and brands, often with no UK ownership involved.
One thing is for sure - the changes in company structure have been rapid and profound and the challenge for unions is often identifying who the partners are, - or if like Bevan you don't like the word “partners”, who should we be negotiating with? Have we any allies and pressure points? What is the union future under the new capitalism?
These are key questions to address tonight.
Take a glance at the UK economy. Some have used the term “Wimbledonisation” - that is, we provide a good location but the top prizes are won by foreigners. That is not wholly accurate in relation to every part of the economy but when you look at foreign ownership of investment banks and many other major financial and professional services companies; at the utilities, carplants and airports; at the current sales of Corus and Scottish Power; at the current hawking round of our biggest manufacturer, British Aerospace, to American buyers, a picture emerges, outside pharmaceuticals and petroleum, of foreign companies owing much of the commanding heights of the British economy - not to mention Manchester United and Chelsea, the current commanding heights of the Premier League. There is, we have learned, a price for everything.
I often muse - where are the nationalist parties on this ‘clear out' sale of British assets? Where are the Conservatives and UKIP when we need them? They have a lot to say when there is the merest hint of a little more shared sovereignty at European level. But on the unfettered sale of our key national assets, they are dumb. Or possibly they have friends earning handsome fees arranging the sales. (Not quite Bevan's famous “vermin” speech at Belle Vue, Manchester but a little Bevanite touch that).
Apart from selling our commanding heights, we have the onward march of shareholder value and its importance in setting executive remuneration. Time was when executives' rewards bore some relation to those of other employees and they were in the same pension fund. These links have gone, and, among other things, it is contributing to the weakening of many pension funds for employees.
Executive pay rose 28% last year. Incomes Data Services recently reported that never in its 15 years of monitoring executive pay have so many earned so much. Until recently I had not realised how much time and energy some boards spent on setting their own remuneration and incentives. Of course, they are negotiating with themselves and when you are in that position, you find it easy to give yourselves the benefit of every doubt. Comparability may have less relevance to most workers than it used to, now we are in a low inflation era. But it is still a potent principle in the boardroom. “Make sure we stay in the upper quartile” is the campaign slogan but they have no need to put it on a banner and take to the streets. They seem oblivious to how this makes them appear to the rest of their work forces. More and more they resemble the Bourbons - and they should be aware of what eventually happened to the Bourbons. This shameless attitude contrasts incidentally with what is happening in Germany where Siemens have cancelled a 30 % executive pay increase after a debacle with the sale of their mobile phones business. It would not have happened here.
Optimists hope that all this will be contained by better informed, more active shareholders. After all, today's shareholders are largely pension funds and life insurance companies and mutuals, seeking to get as high a return as possible for members, for us, and millions like us. They hope that our values will put pressure on the tycoons and boardroom titans to behave responsibly and improve governance.
I have to hope that they are right, and I recognise the sincerity of some people in this field, but I cannot help but notice that some investors who are proud to work to a corporate social responsibility agenda can also be the toughest seekers of high returns. Thus the world's largest pension fund is switching more and more over to hedge fund investment. The Californian Public Employees Retirement Scheme recently won approval to invest up to 25% of its portfolio in hedge funds. Railpen, the UK rail fund, has invested £ 600m and Sainbury's has trebled its exposure to hedge funds.
Of course, as Janet Bush said recently in the New Statesman, hedge funds are not new, just notorious. They have been around since the late 1970s. But their scale is accelerating and the funds they manage are equal to the GDP of the eighth largest economy in the world - Brasil.
Yet how many of us have much understanding of what a hedge fund is? Here is a definition from “Google”
“The term hedge fund has come to mean a relatively unregulated investment fund, often a partnership rather than a corporation in form, and characterized by unconventional investment strategies (ie., strategies other than investing long only in bonds, equities or money markets).
“Hedge funds use alternative strategies such as selling short, arbitrage, trading options or derivatives, using leverage, investing in seemingly undervalued securities, trading commodity and FX contracts, and attempting to take advantage of the spread between current market price and the ultimate purchase price in situations such as mergers. When strategies become extremely complex hedge funds may acquire potential and unanticipated risk of catastrophic losses.”
Other relevant facts - they are attracting many of the nation's best young science brains on the promise of fabulous rewards. They are often based in tax havens. Most of the world's most prominent banks run such funds in conjunction with more orthodox activities. And they are looking for quick returns - around 15% pa. National regulators do not know what to do and are fearful if they do anything, the funds will emigrate entirely. The German Vice Chancellor, Franz Müntefering called them “locusts”. He was right.
It should be the European Commission which takes this on if nation states are too timid to do so. But the EU internal market commissioner, Charlie McCreevy recently ruled out new rules, saying hedge funds played a crucial role and put the “fear of God” into company boards - for the benefit of all - he claimed. It is the Americans, burned by huge financial scandals who look at least a little more likely to act. What is evident is that no-one in the UK is facing or dare face the challenge - and something like 70% of Europe's hedge funds are London-based, except of course for tax purposes; 80% of the world's hedge funds operate from the Cayman Islands as regards tax.
I have concentrated on hedge funds and their bewildering array of variations to indicate how powerful the financial services sector has become. But if hedge funds are the Provisional Wing of the sector, then there's plenty of more mainstream players contributing to the situation of debt financed, casino capitalism, with public companies, unless very strong, being chips on the gambling tables.
For trade unions we know that this capitalism, when it penetrates sectors such as food and beverages, hotels and catering, accelerates layoffs, casualisation and outsourcing. It “adds volatility to a destructive mix which is profoundly destabilising for workers and their unions.” The International Union of Food and Hotel Workers has direct experience of this, as member confederations come to the international union for aid in helping to turn back particular company offensives. Often these offensives are promoted by the investing shareholders, as they seek huge rates of return. Unions seeking to bargain over changes in conditions or negotiate the impact of restructuring, or challenges to closures, run up against the new financial power brokers. These people are not so interested in arguments about improvements in production or services , increased productive capacity, new product lines, long term viability of markets or consumer needs. They want their quick returns.
Some may say, it was ever thus in business but let's look at a few examples from the food and beverage sectors:
• Heineken in 2006 announced half year results which earned profits 56% higher than the previous period and simultaneously announced the cutting of 1,000 jobs in the following year.
• The brewers, Inbev announced a 15,3% increase in earnings and plans to cut 360 jobs at the same time; including my favourite Boddingtons brewery at Strangeways, Manchester.
• Nestlé announced a 21 increase in net profits while promoting job insecurity, losses and outsourcing, casualisation, production transfers and closures.
• Gate Gourmet is perhaps the best known case in the UK. It was in the news for weeks as the doughty Asian women working for the catering company supplying British Airways fought for their jobs. Gate Gourmet had been bought by the private equity firm, Texas Pacific. The new company planned a period of “organic growth” which began, in the words of the IUF “a meticulously planned assault on trade unions, beginning at Heathrow”. The company stealthily hired hundreds of contract workers before mounting an attack on the existing workforce and their working conditions. You saw the scenes on TV no doubt, with hundreds of older women in Saris standing on a roundabout, on strike for their jobs, and being told by an American manager they were sacked.
Often the problem we face here is that the fund managers who control these companies, in effect, do not see themselves as employers. In few systems are they defined as employers and have none of the legal obligations that employers have. In the case of Gate Gourmet, that company denies that the management decisions it took have anything to do with Texas Pacific, although it does acknowledge its fiduciary duty to the investor company. I almost said “parent company”. In days gone by, I could have used that as an accurate, legal definition, but the new investment funds are not ‘parents'. They want to run their children's lives but they are not parents...or employers.
So we are seeing therefore is a yet further disintegration of the social nexus between worker and employer. This relationship, dating back to the industrial revolution and beyond, has produced layer upon layer of employment law and, importantly a culture containing broad social rights and obligations. The new capitalism wants none of it. It wants to be foot loose and fancy free, without obligation. In the old days, when trade unions - especially those in North America - realised that corporate campaigning could be more effective than striking, we had some noticeable successes. But what if the ultimate owner is a hedge fund?
Can you go and lobby the AGM, as we did with our corporate campaigns? Can you organise with other disgruntled groups of share-holders as we did then? Not so easy.
The European Central Bank is worried about all this even if Mr McCreevy is not. The US authorities are worried too. But the fear to act is widespread and deep rooted. No longer does the Ford Motor Company treat its banks and investors with a degree of disdain, demanding their services on Ford's terms. The new titans are not the old ones. For Ford then, read Goldman Sachs now. It is the capital markets who call the shots.
So must we all get used to a new language of leveraged finance, second lien loans, mezzanine finance, syndicated loans, global share insurance, credit default swaps, collateralised debt obligations and so on?
I think we must. All this is too important to be left to the practitioners who have a vested interest in obscuring what they do from the rest of us. At the very least, we must understand much more fully what they do - that they are speculating as much as legitimately hedging risk and that these practices are dangerous to economic stability, traditional industry and jobs. I would like to see the City pages of the press more challenging and less respectful on these matters.
So what else can we do? The answers are not easy. If you believe like me that the recent relative success of the UK economy has been based on rising house prices, mostly fuelled by earnings from the financial services sector and perhaps more recently the increase of the public sector, you worry about clumsy intervention with negative or unintended consequences.
But firstly, we should stop according financial services a specially privileged place in the UK economy. It was the only industry specifically mentioned in the Treasury's five tests for possible euro entry yet UK overseas earnings from the City are still only one tenth of those from exporting goods. With all the pressures, the old capitalism is not dead. It needs help and respect, not laissez faire neglect. It needs to stand up for itself, speak with a louder voice and not be in awe of financial markets. The CBI need to become a lot clearer that they must stick up for industry not just - as they do on autopilot - against trade union lobbying and any hint of regulation, but compete against the overmightly financial sector.
Second, we should examine - and I am currently pressing the EU to do this and will continue to do so at the forthcoming macro economic dialogue- how capital markets fund research and development and innovation - if indeed they do. I believe that the next big idea after the IT revolution will be environmental technology. So, more tellingly, does General Electric of America and they are directing their R+D towards this area. Will the city slickers earn at least some of their fat bonuses by backing inherently risky ventures on tough issues like climate change and renewable energy. Some hopes I fear. Short term thinking is the enemy of innovation and R+D.
Can we revisit the idea of a National Investment Bank providing capital for productive purposes in key areas of scientific and technological challenge? This now would need to be set in the context of the single market in Europe but we must find a way of supporting serious R+D and innovation. We cannot not rely on the market, especially with the way it is evolving.
Next, we should expose - and prosecute, fiercely, corporate wrong doing. This is not victimless crime. The perpetrators are robbing us all and should not receive an easy time. The Americans are showing the way again, rightly ignoring the CBI's unctuous concern for those Britons caught up with the Enron scandal.
Next, politics should not be intimidated by what is going on. The present disenchantment with politics reflects a feeling that it has no answers to the big issues. The Labour Government on some issues - for example child poverty, Africa, the NHS - is trying hard to make a big difference. On other issues, especially on achieving a high level of employment, it has succeeded; who honestly thought 10 years ago that we would get anywhere near full employment ever again? We are not proud of the quality of some of the jobs but the achievement is real. It would have been appreciated by Nye Bevan even if he would have been bemused by the Government Ministers and ex Ministers criticising so loudly and confusingly the outcomes of the record spending on his beloved NHS. You don't need an Opposition and the Daily Mail if your own side accentuates the negatives.
Yet I am critical of the Government for swerving away from confronting the rise of this new, overmighty capitalism. Their worry was, and is, overmighty unions. The reality is overmighty financial capitalists. Yet there were some signs of early promise, never realised. In 1996, Tony Blair made a speech in Singapore calling for stakeholding, not shareholder value, to guide us into the future. He was following Will Hutton's praise for the Rhineland model of Germany and France in his best selling book - “The State We Are In” which had called for entrepreneurial accountability to unions, communities, the environment as well as shareholders. I was elated and wrote immediately an article for the Times hailing this Damascus-like conversion.
My elation was brief. Before Mr. Blair's plane had touch down back at Heathrow, the speech's meaning had been hastily redefined. It was made clear that there was no intention to re-empower unions, Labour was the friend of business and capital, not a promoter of stakeholding at all. The term stakeholding was never heard to pass the lips of the Prime Minister, nor the Chancellor again.
But yet, but yet...
The latest companies Bill codifies the principle of what it calls “enlightened shareholder value”. That requires a director to promote company success in the interests of the long-term, company employees, suppliers and customers, the community and the environment, and maintain a reputation for high standards. I do not yet know what we can make of this but it is a welcome step in the stakeholding direction.
Finally, what should be the trade union response? We may not have always liked it but we knew where we were with the Ford Motor Company. Goldman Sachs by contrast is a foreign land and hedge funds are in a different universe. We won't achieve anything by cuddling up to them but there is wide scope for campaigning on the corporate reputations of at least the mainstream financial institutes. We should do this, and mobilise our own shareholder power. After all, workers are still around 50% of the trustees of some of our largest pension funds.
We should also throw our weight behind the new International TUC formed 2 weeks ago of socialist, christian and former communist unions. It is burying old tribal conflicts in our own ranks to lead the fight against the dark side of globalisation and to campaign for taxation on the speculators such as the Tobin tax. We must support it to become a champion of good business practices, of decent relations with decent employers while ruthlessly fighting the speculators. I will be taking on the additional job of general secretary to a Pan European Region of the ITUC operating from Connemara to Vladivostock.
We must also use to the full the European dimension. A region of the world with 450 million people characterised by decent welfare states, public spending averaging around 40% of GDP, excellent public services in the main, the world's strongest unions, spreading democracy and union rights through Eastern Europe - this Social Europe seems to me to be a great source of union strength. It can take on the casino capitalists and to promote respect and rewards for those who accomplish real things in improving our society. We must encourage it to develop European rules for the games of the new capitalism, and to contribute towards drawing up global rules. It is no longer good enough - if it ever was for the Labour Government to fight off European initiatives to bring some greater co-ordination and order to financial markets.
Nye Bevan was not a dreamer about a common European future. He regarded the Common Market as a vehicle for rapacious capitalism and some are still trying to make it so. Indeed it could have been so. But so far trade union and socialist action - and to be fair Christian Democracy too - has made it something quite different. And Bevan was of course an internationalist who today would have recognised that the new global capitalism requires a global response. He would have recognised that in this as in other fields like world poverty and global warming, Britishness may be important but it will not be enough.
We have to fight the battle all the time. Every generation needs mobilising to preserve what we have and to promote progress based on the values of social solidarity. Following Vice Chancellor Müntefering, I believe that the future is based on the industrious bee, not the rampaging locust, on strong trade unions balancing capital, - yes wherever possible forming partnerships - and on active Government - at international, European Union, national and regional levels -, not just active shareholders.
So tonight, chairman, I have taken you on a tour of trade union views of the new capitalism. As ever, the problems are clearer than the answers. But the memory of Aneurin Bevan demands that we undertake restlessly and urgently a search for these answers. Our future - the world's future - is too important to place in the hands of the new capitalists.
Thank you