Why people power is good for business

The old world of workers and bosses has gone; we all own bits of the big companies now, through pens

Labour has traditionally been suspicious of business, if not downright hostile. That made sense for a party born out of the struggle of labour against capital, against the exploitation of the many by the few. Labour was for the public not the private sector, workers not employers, producers not consumers. Even 20 years ago, Labour rarely consulted business about economic policy and it was common for constituencies to refuse membership to managers in the private sector.

Part of Labour's electoral success from the mid-1990s was undoubtedly its ability to lure business away from the Conservatives. But today we are accused by some of abandoning our traditional values and supporters in order to get into bed with big business - while some in business worry that we are abandoning pro-enterprise policies for a return to "tax, spend and regulate".

We should be able to take it for granted that our country needs successful, innovative businesses - generating good jobs, creating the wealth that sustains pensions and public services. We should be able to take it for granted that any successful modern Labour government will support enterprise and entrepreneurs, and want to create an environment in which more businesses start up, grow and prosper.

It may seem a big stretch for Labour to embrace the entrepreneurs and small traders once perceived as the bedrock of Margaret Thatcher's support. But William Morris rejoiced in the medieval craftsmen who were "masters of their time, tools and materials". It no longer makes sense for the left to celebrate employment and sneer at employers and the self-employed. As job growth shifts to smaller firms, and more people express their talent and energies in self-employment, we should celebrate entrepreneurs.

A pro-enterprise agenda does not mean abandoning Labour values. We want good businesses. A good business is one that provides the best goods and services and makes a profit by doing so. But we do not stop there: we rightly criticise products made in third-world sweatshops. We expect business to be a good employer - treating employees with respect and dignity, providing even those engaged in less-skilled tasks with reasonable pay and the opportunity of advancement. We want businesses to accept their environmental responsibilities rather than ignore the costs of pollution. And we want directors and senior managers to work in partnership with investors and fellow employees.

Good businesses are not simply the product of inspired individuals, nor will they be created by appealing to altruism. Businesses are social as well as economic institutions, and they operate within a social context - only in part the outcome of government action. Government cannot simply create good businesses, whether through regulation, direct support or tax policy. But a progressive government has more levers at its disposal than it sometimes understands.

These levers include regulation, which we know is generally more effective at eliminating the worst than creating the best. Since the introduction of the minimum wage, businesses can no longer take the path of low-wage, low-skill, low-margin production. But regulation can also stimulate better practice. Companies that lead in working-time reform - offering employees a better work/life balance - do so because they have learnt that they will be more successful as a result. Laws entitling employees to negotiate new working patterns will accelerate the deep change of culture that we need.

Regulation cannot force managers to invest in creating partnerships with employees and unions, but if it sets minimum standards for sharing information and consulting employees, more managers will aspire to best practice. Nor should we underestimate the role of competition or the progressive case for pro-competition policy. Monopolies and cartels are a threat to consumers, and competition - pitting smaller against larger, new entrant against incumbent, the innovative against the lazy - is a progressive force. The centre left should not defend firms whose underinvestment, lack of innovation or foresight, poor management or out-of-date processes have left them vulnerable to competition. However, unlike our political opponents on the right, we will never walk away from the victims of inevitable economic restructuring. The priority must be to help them get new jobs and, where necessary, new skills as quickly as possible.

Too many firms are stuck in what economists call a low-investment, low-margin equilibrium. These firms, producing goods and services that require less-skilled workers and low levels of technical equipment, cannot afford good wages or generate high profits: they, and their employees, are the most vulnerable to competition from lower-wage economies. Investing in their employees - including many of the seven million British workers without basic literacy and numeracy skills - may not save the employer, who may not have the management know-how or market opportunities to use better-skilled workers. But it will help those workers find better jobs and thus raise the productivity levels of the UK economy as a whole.

Skills, strong regions, competition, intelligent regulation, better infrastructure, investment incentives and a sound economic climate: these are familiar and essential ingredients of Labour's economic policy. But for a party for whom ownership once mattered above all, we have been curiously slow to grasp the change that has taken place in the ownership of the UK economy.

Publicly quoted companies - the FTSE 100 and others - are only 0.1 per cent of the UK's total businesses. But they account for 25 per cent of turnover. We, the people, own more than 50 per cent of their shares - not just through individual share ownership in which Margaret Thatcher invested so much hope (and which accounts for only around 14 per cent) but, more significantly, through pension funds and insurance, as well as unit and investment trusts. Big business now belongs to the many, not the few.

It is in our name - in the name of creating shareholder value, of "aligning managers' interests with shareholders" - that huge share options have been granted and so much value destroyed.

Labour has already made a start on the issue of executive pay. By requiring companies to publish full details and hold annual shareholder votes on executive pay, we have made company directors accountable to those whose interests they are meant to represent. And we are reinforcing a change in public and corporate attitudes towards payment for failure.

We have also acted to strengthen company boards and to ensure independent, honest auditing. The horrific events at WorldCom and Enron in the US demanded a response from governments around the world. In the UK, we took robust action to improve standards but not at the cost of further market instability and investor confidence.

This is a good start. At several of this year's company AGMs, individual shareholders and trade unions spoke up but too little was heard from the pension fund managers. Voting levels, at 55 per cent, must be improved. In some cases, millions of votes - our votes - were simply not there. Company directors, from whom we demand increasing transparency and accountability, are, unsurprisingly, frustrated by the actions of investment institutions that do not always practise the transparency they demand of the companies in which they invest.

Too many fund managers, faced with an under-performing company, continue to support an inadequate management. Others simply pull the plug and switch investments. As the share price tumbles, a merger or takeover becomes the only way to replace a failed management. But there is another approach. Hermes - a fund manager responsible for £40bn of pension fund money, including 178,000 BT pensioners - starts from the principle that "the primary goal of a UK listed company is to be run in the long-term interests of its shareholders - to gen- erate value for them". The "Hermes principles" are based on companies developing coherent strategies for creating value over the long term; finding cost-effective ways to incentivise managers; managing relationships with employees, suppliers and customers; and behaving ethically.

The old agenda for the left was to own or control large companies on behalf of the people. The new agenda must be to enable people to move the large companies they already own towards sustainable prosperity through responsible management. Through voluntary codes or regulation, they need to become accountable to the millions whose savings they handle.

Active ownership takes time: to make sure the right management is in place, to set new financial frameworks and to support an improved workplace. Some companies have already expressed a fear that, with new and more demanding standards of corporate governance - and ever more complex markets - fund managers will resort to "box-ticking" instead of trying to understand a firm properly. But active owners, accountable to a company's ultimate owners - the people - are what a progressive economy needs.

Investors need regular information on how fund managers are acting and voting on their behalf. There should be a greater flow of information on how fund managers are exercising their powers and how active an interest they are taking in the companies in which they invest. We should also consider how to advance further the agenda for collective employee share ownership. And, recognising that pension fund investment is increasingly international, we need to consider how to mobilise the power of owners, as well as consumers, to promote better businesses globally as well as at home.

Some have sought to use rewards for failure, or the scandals of Enron and WorldCom, as an excuse for an onslaught on business. We must not fall into that trap. Our best businesses - those that are innovative, profitable, and socially and environmentally responsible - are great places to work in and deliver leading-edge products for consumers. Such businesses should be our pride and joy, and those who lead them our allies.

But our country needs more of them. By empowering people - the people who indirectly own so much of the British economy - we can help to deliver better businesses, better jobs and a better quality of life for all.

Patricia Hewitt is Secretary of State for Trade and Industry. This is an edited version of her IPPR pamphlet A Labour Economy: are we nearly there yet?