The New Statesman Essay - The rout of the stakeholders

Whatever happened to Will Hutton's vision of "a less degenerate capitalism"? <strong>Richard Roberts

''This is a book of political economy" was the unpromising first sentence of a treatise published in January 1995 by the Guardian's economics editor. Yet The State We're In by Will Hutton became one of the publishing phenomena of not just the decade, but the century. It sold a staggering 200,000 or so copies, by far the most for a book of its kind since J M Keynes's The Economic Consequences of the Peace shortly after the First World War. For months it headed the non-fiction bestsellers, ahead even of Rosemary Conley's Complete Flat Stomach Plan. Something was in the air.

At the heart of Hutton's analysis of what needed to be done to improve what he saw as a generally lamentable state of affairs were the failings of the City of London, which in his first chapter he uncompromisingly labelled as "a byword for speculation, inefficiency and cheating". Indeed, the whole book, a tract of huge energy and moral force, was permeated by a visceral distaste for the City, where he himself had worked as a stockbroker for six years in the 1970s. By the time he left, he had come to see it as an unwarrantably wealthy, selfish and opportunistic island, cut off from the rest of Britain and almost wholly indifferent to its fate.

Hutton was especially critical of the City's third-rate servicing of British industry. The provision of unduly high-cost capital, the imposition of unnecessarily short payback periods, an inherent bias towards takeovers that gave short-term stock market rewards at the expense of long-term investment - all were part of his formidable charge sheet. "The great challenge," he declared, "is to create a new financial architecture in which private decisions produce a less degenerate capitalism. The triple requirement is to broaden the area of stakeholding in companies and institutions, so creating a greater bias towards long-term commitment from owners; to extend the supply of cheap, long-term debt; and to decentralise decision-making."

The key word in all this was "stakeholding" - the notion that those with a stake in a company's fortunes should be not only shareholders (in almost invariable practice the large investing institutions of the City of London), but also customers, employees, suppliers and the community at large. The State We're In immediately established itself as the classic statement of the virtues of stakeholder capitalism - a form of capitalism that, in Hutton's eyes, was equally far removed from the corporatist stagnation of the 1970s and the Thatcherite excesses of the 1980s. It was an immensely seductive vision, but neither Hutton nor his followers yet knew whether it had political legs.

For a few tantalising weeks early in 1996, it seemed that it did. On 8 January, the opposition leader, Tony Blair, set out to the Singapore business community (of all people) his vision of a "stakeholder economy", one in which "we shift the emphasis in corporate ethos from the company being a mere vehicle for the capital market to be traded, bought and sold as a commodity, towards a vision of the company as a community or partnership in which each employee has a stake . . .". Several commentators proclaimed that here at last was new Labour's long-awaited Big Idea.

In the Independent, for example, the historian, political economist and former Labour MP David Marquand claimed that Blair, "in nailing his colours to the stakeholder mast", was "opening the door to a left-of-centre project for government, more radical than anything attempted in this country in modern times". He added: "The notion of a stakeholder economy . . . must imply a profound break with the assumptions and practices that have been central to Britain's shareholder capitalism for nearly 300 years." There would be opposition from the world financial markets, from which Blair would need "to de-couple the domestic economy", but the future PM "has gone too far to turn back". In Marquand's judgement, Blair's "only choice is to charge on".

Yet, in the following months, Blair failed to put any further significant flesh on his stakeholder vision. Instead, he took refuge in semi-meaningless platitudes such as: "The stakeholder economy is about making us One Nation again." Even effusions like this quickly dried up and, by March 1997, weeks away from a general election, stakeholding was apparently dead in the water. "After a brief flirtation with the term, Labour leaders now seem embarrassed to mention it," Gavin Kelly and Andrew Gamble regretfully noted in the New Statesman. "They are more concerned to explain what they do not mean by stakeholding than to say what they do."

It was the turning point that had failed to turn. Why did Hutton make such an impact in the first place? Why did that impact fail to translate into new Labour policy? And why, despite the success of Hutton's book suggesting that this was an idea whose time had come, are we now further away from a stakeholder society than ever?

The crux lies in the 1980s, a decade of rampant materialism that reached its apogee with Margaret Thatcher's re-election for a third term in June 1987. By that time, three developments - a raging bull market, the "big bang" that opened up the London securities market to the world at large, and a series of large-scale privatisations - had the cumulative effect of putting the City in the centre of the national picture to an extent it had not known since the South Sea Bubble in the 1720s. Moreover, the City itself, long a rather stuffy, unfashionable backwater, was changing fast. In essence, it was becoming Americanised and it became emblematic of a whole new way of life and set of values: greed was good, lunch was for wimps, the sky was the limit for Essex barrow boys, and conspicuous consumption was the name of the game.

Then came the reaction - a largely emotional one, which started in 1989 as the wheels came off the Lawson "economic miracle". Its manifestations, against a background of downsizing, job insecurity and relentless globalisation, included the downfall of Thatcher, public outrage at the pit-closure programme announced in October 1992 and the media campaign against "fat cats" (Cederic Brown et al) in the newly privatised industries. Hutton's bestselling book (but how many of the 200,000 copies were actually read?) hit that public mood. Eventually, in May 1997, five years after Labour should have won but was thwarted by the fear of tax rises and lack of confidence in Neil Kinnock, the pain-free, cost-free velvet revolution discharged the emotional bill to be paid for Thatcherism.

Britain was turning from a manufacturing into a service economy. But industry's disenchantment with City short-termism and general exploitativeness loomed large in the anti-Thatcher reaction in the late 1980s and early 1990s. Sir John Harvey-Jones of ICI, Sir Hector Laing of United Biscuits and other prominent captains of industry inveighed against unnecessary takeovers which, as they saw it, were fuelled by merchant bankers more concerned with their advisory fees than with the national economic health. Accusations of short-termism so proliferated that the Department of Trade and Industry organised a conference on the subject in June 1990, where one industrialist (Anthony Thatcher of the Dowty Group) referred bitterly to "three-monthly-review fund managers, who see equities as merely trading counters".

Happily for those uneasy about full-blooded, market-oriented, deal-driven Anglo-Saxon capitalism, an alternative model was at hand: the "social market" economies of Japan and Germany, which had flourished during the 1980s. The influential Capitalism Against Capitalism, by the French businessman Michel Albert, appeared in 1991, with an English translation two years later. "With the collapse of communism, it is as if a veil has suddenly been lifted from our eyes," he argued. "Capitalism, we can now see, has two faces, two personalities. The neo-American model is based on individual success and short-term financial gain; the Rhine model, of German pedigree, emphasises collective success, consensus and long-term concerns." Was this latter model (with its smaller role for the stock market and less frequent takeovers) economically competitive as well as socially desirable? Albert made a big claim, one that Hutton would echo loudly: "In the last decade or so, it is this Rhine model - unheralded, unsung and lacking even nominal identity papers - that has shown itself to be the more efficient of the two."

Yet the cruel reality was that, by the mid-1990s, the heavy economic cost (including soaring unemployment) of reunification was undermining Germany's position as resplendent flag-bearer of Rhenish capitalism. Nor, by this time, was the Japanese economy a happy advertisement, to put it mildly, for the non-Anglo-Saxon model. "Shareholders have benefited in the US and UK during the 1990s," Barry Riley noted in the Financial Times shortly after Blair's Singapore speech. "Stock market indices in these countries have shown average annual growth of 10 per cent and 6 per cent respectively. Japan has been slightly negative, and Germany and France have recorded 5 per cent or less."

Thus, by the mid-1990s, stakeholding, whatever its emotional tug, was going against the larger economic flow. One was the wave of demutualisations, spearheaded by the building societies and their members taking rather tardy advantage of the 1986 Building Societies Act, which allowed them to convert to shareholder ownership. The process (immensely enriching to the City) began in 1989 with Abbey National and hit a peak in 1997, as the biggest building society, Halifax, and four others all abandoned their long traditions of mutuality in favour of plc status.

Masked by choruses of "football's coming home" and Blair's celebrated heading session with Kevin Keegan, something similar was happening in the newly megabuck world of Premiership football. During one season alone, 1996/97, Chelsea, Newcastle United, Aston Villa, Leicester City and Sunderland all joined Spurs and Manchester United on the stock market. "UK Football plc: The Winners Take It All": the report in March 1997 by the investment bank UBS could hardly have been more graphic.

Furthermore, by the mid-1990s, the City had its very own slogan with which to counter the insurgent stakeholders. This was a small, unassuming, but immensely powerful phrase: "shareholder value". It was an import from America where, in the 1980s, General Electric under Jack Welch and Coca-Cola under Roberto Goizueta had led the way in their emphasis on a focused financial delivery to shareholders, instead of on growth and size for their own sakes. The most important early British apostle of shareholder value was the unsentimental clearing banker Brian Pitman, who through his unyielding clarity of approach turned Lloyds into a formidable money-making machine and almost single-handedly ended the paternalist "Captain Mainwaring" tradition in British banking. During the 1990s, the concept of shareholder value became well-nigh irresistible for all concerned - whether the shareholders in the City or any new chairman or chief executive looking for a flag to fly and wanting credibility in the City. It was simple, it brooked no doubters and, perhaps above all, it was an American concept in an increasingly Americanised world.

Nor was that all, as new Labour in opposition pondered its approach in government. The financial markets had long had the capacity to torpedo the economic policies of elected governments (witness the effects of successive sterling crises between the 1950s and 1970s), but during the 1980s those markets became infinitely bigger and infinitely more demanding - not only in Britain, but across the world, as footloose capital hurtled around in search of the highest returns. "Bad monetary and fiscal policies anywhere in the world are reflected within minutes on the Reuters screens in the trading rooms of the world," the legendary American banker Walter Wriston smugly reflected in 1987. Five years later, Black Wednesday and George Soros virtually ripped apart the Major government, destroying its reputation for economic competence.

The message was taken to heart by Blair. On a visit to Wall Street in April 1996 - just at the time he was silently ditching stake- holding - he told bankers and businessmen that "errors in macroeconomic policy" by a future Labour government would be "punished rapidly and without mercy" by the markets. International investors now knew that they had nothing to fear from new Labour - a confidence fully justified a year later as the two main parties fought the election on almost identical macroeconomic policies.

One and a bit terms on from Blair's pragmatic decision not to offend powerful vested interests - none more powerful than the City - Will Hutton's stakeholder economy seems more remote than ever. In the first week of the first term, Labour surrendered control over monetary policy to the Bank of England and thereby further consolidated its credibility with the markets. There has been no legislation to check further demutualisations. Across the corporate landscape in 2001, the City calls the shots. Sir Iain Vallance falls on his sword at BT after first being urged to take a huge punt on the mobile phone craze, but then being castigated for paying too much. A similar fate overtakes Lord Simpson at Marconi who, again at shareholder prompting, attempted to cash in on the internet craze. Marks & Spencer, once so generally admired as a commercially successful company pursuing wider social values, has its City reputation shot to pieces as it emerges that no other company in the FTSE 350 had destroyed more shareholder value in the three years from December 1997. The decision by the Anglo-Dutch steel giant Corus to cut more than 6,000 jobs persuades the stock market to trade energetically in the shares, which rise almost 10 per cent.

"Delivering shareholder value is one of the key corporate aims if, in fact, it is not the one and only raison d'etre," declared the March 2000 issue of Management Accounting. In the NS, Hutton himself wrote: "Chief executive officers know that, while they talk the language of corporate social responsibility, the real game is keeping up their share price."

No industrialist dares put his head above the parapet and criticise the City. In effect, there now exists an unspoken, unholy alliance between the cowed (but exceedingly prosperous) captains of industry and the institutional investors - with stock options comprising up to half of senior management's remuneration, they have a mutual interest in getting share prices as high as possible.

Nor is it only industry that does things the City's way. Over the past few years, the protracted reaction to Thatcherism has come to an end, and it has become clear that the psychic shift of the 1980s is now entrenched in society at large. Should one feel guilty about personal wealth? The question has only to be raised to be ridiculed. Not even the sight of the City's phenomenal bonus seasons in 1999 and 2000 was enough to produce more than a distinctly muted public outrage. Everywhere one looks - whether in the private domain or parts of civil society, such as the universities, the BBC and the NHS, that were once outside the market place - money is the new lingua franca, with, as often as not, a direct City interest (such as in the private finance initiative) involved.

How apposite, then, that BBC2 earlier this year should run a ten-part retro series unblushingly called I Love the 80s. Only when the stock market's present travails have run their course shall we know whether the British love affair with the City is for ever, or whether the time will at last come for Hutton and his stakeholders.

Edited extract from City State: how the markets came to rule our world, by Richard Roberts and David Kynaston, published by Profile Books on 19 September (£17.99, or £14.39 + £1 p&p at

This article first appeared in the 17 September 2001 issue of the New Statesman, The end of the open society?