An Irish Sea border is a silly idea but so is the cake-and-eat-it bluster

The EU wants to annex Northern Ireland. Such was the predictable hysterical reaction by pro-Brexit MPs and commentators to the European Commission’s attempt to turn December’s Phase 1 agreement into a detailed withdrawal agreement.

What has really upset people is the Protocol on Ireland/Northern Ireland, which starts on Page 98. It contains the suggestion that, in the absence of any other way of avoiding a hard border in Ireland, it would be necessary for Northern Ireland to remain in a customs union with the EU. The corollary of this would be a customs border on the Irish Sea, effectively dividing the UK into two customs zones.

Of course, Theresa May is right when she says that “no United Kingdom prime minister could ever agree to it”. Chuka Umunna is also right when he says that parliament would never vote for it. A customs border on the Irish Sea is a silly idea which would create more problems than it solved. Leaving aside the possibility of Loyalist violence, the flip-side of the Republicans potentially attacking the border posts, there is the simple economic impact. While Northern Ireland’s principal foreign trading partner is the Republic of Ireland, the majority of its external trade goes to the rest of the UK. A customs border with Great Britain is therefore likely to be more damaging than one with the Republic. It also wouldn’t remove the Republic’s other Brexit headache, the loss of its export bridge to the rest of the EU.

The European Commission knows all this and knows that such a thing would never come to pass. It also must have known that its suggestion would provoke outrage. So why do it? Was it an insensitive provocation or was it, as the FT’s man in Brussels Alex Barker reports, because the EU wants to force a reckoning? One EU diplomat even used the term ‘shock therapy‘.

Paragraph 49 of the December agreement read:

The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all- island economy and the protection of the 1998 Agreement.

That effectively means that unless the UK can suggest either a form of trade deal or a technological solution that removes the need for border checks, the UK must retain full alignment with the single market and customs union at least for Northern Ireland.

Within days of the report being published, David Davis told Andrew Marr that it wasn’t really an agreement, just a statement of intent. This annoyed the other major players in the EU who thought they’d secured an agreement which would allow them to move on to the next phase of the negotiations. The UK also failed to come up with any detailed solutions, despite insisting that it could all be sorted out somehow. In the absence of anything more concrete, the EU came up with what it described as its fallback plan; an EU and Northern Ireland customs union.

Government ministers have probably known for some time that there isn’t an easy solution to the Northern Ireland border question. If Boris Johnson really believed that it was no more complicated than administering the congestion charge between the London Boroughs of Camden and Westminster, he wouldn’t have been the slightest bit worried by the European Commission’s fallback protocol. His response would have been, “What a silly suggestion. Everybody knows it won’t come to that because we have the technology to avoid customs checks at the Irish border.” Instead, he got angry and blustered. Indeed, it is the same people who have been assuring us all along that technology would solve the border question (many of them quoting an EU report that said nothing of the sort) who have gone apoplectic at the EU’s protocol. Which was, I suspect, the whole point of it.

So far, the government has avoided coming clean about the trade-offs that Brexit makes inevitable. It has stuck to the cake-and-eat-it line whereby the UK can end free movement and negotiate its own trade deals while avoiding a hard border in Ireland and any economic damage from trade friction.

But there is no magic solution to the Northern Ireland border. As soon as the UK starts importing goods from outside the EU under its own trade agreements, there has to be a customs border with the Republic of Ireland. There is a straightforward decision to be made. Do we want the UK to have its own trade deals with other countries or do we want to maintain the current border arrangements in Ireland? We can’t have both. If we choose the hard border option, the EU’s current line is that it will refuse to discuss trade deals. How firmly it will stick to this is anybody’s guess but it certainly increases the risk of the UK leaving the EU without any sort of trade deal.

So it’s not difficult this. It’s a straightforward trade-off. We can have some of what the Brexiters promised but not all of it.

The Brexit Dilemma

As a country, we need to decide what is important to us and what we are prepared to give up to secure it. But so far we haven’t had any proper political debate about any of this. The government has maintained that we can have it all and the Labour Party has, until recently, kept quiet. Now, the EU’s protocol on the future status of Northern Ireland, whether by cold hard calculation or ham-fisted provocation, is likely to force the issue.

As a former colleague of mine used to say, “Sometimes, the only way to get people to understand the shit they are in is to rub their noses in it.”

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Away day to nowhere

It’s fashionable to poke fun at corporate away days. There’s even a Famous Five parody devoted to the subject. Many of you will no doubt be familiar with these events. They usually start with some fine words about openness and trust then finish hours, or even days later, with a set of statements on flip charts.

Such things were the original inspiration for the title of this blog. For, all too often, no-one actually believes in the things written on the flip charts. Either that, or they are so ambiguously worded that people can interpret them in any number of ways. It often takes as long to wordsmith the statements as it does to come up with the ideas in the first place. The result is that people sign up to what is on the flip charts, then go back to their day jobs and carry on pretty much as before, while slagging off their colleagues and complaining about what a waste of time the away day was. As a result everyone will start next year’s away day with even lower expectations, which will duly be fulfilled.

It sounds like the Cabinet’s away day was a classic of the genre. From what I’ve heard it had much of the usual paraphernalia, including breakout rooms. You have to have breakout rooms. And the result was predictably meaningless.

“So, we’re going with Canada Plus Plus Plus and Managed Ambitious Divergence then. Are we all happy that we are strategically aligned on these principles?”

“Yes. Looks good to me.”

“Should we have another Plus, you know, like Canada Plus Plus Plus Plus? Might that look a bit more ambitious?”

“Actually, I think we’ve already got too many pluses. Another one will just look silly.”

“But David has already talked about Canada Plus Plus Plus, so if we lose one it’s going to look weak.”

“OK, OK, let’s go with it. I’m not that fussed either way.”

“Right, so that’s agreed then.”

“Hang on, Managed Ambitious Divergence, that’s M.A.D. That spells mad.”

“Oh bugger! That’s true. Right. Anyone got another idea?”

“Er, how about Ambitious Managed Divergence?”

“Yeah, that’ll do. Just draw an arrow, Amber, so it shows we are swapping the words around to read Ambitious Managed Divergence.”

“No, write it all out again, Amber, otherwise we’ll get confused.”

“Write it in capitals.”

“Shall I use a different colour?”

“Look, get a new flip chart and write the whole thing again.”

“What, all of it?”

“Come on, Amber, it’s not that bloody difficult.”

“Well if you’re so clever, Boris, you come up here and do it.”

“Give me that pen. Look. AMBITIOUS. MANAGED. DIVERGENCE. There. Job done. Are we all agreed on that? Good. Now can we go for dinner?”

I jest, of course, though it is usually one of the women that ends up doing the flip charts. So too, it’s often a bombastic man whose contribution to the process has consisted of content-free grandstanding and rhetorical hand grenades who complains about the lack of pace and progress.

Executive team away days can work. I have seen people come up with useful stuff. I even saw one team spend an entire day-and-a-half exploring lots of ideas only to discount them all. That was time well spent because by eliminating what they shouldn’t do, it helped them to focus much more clearly on what they should. The trouble is, away days have a bad name because, a lot of the time, they simply paper over the cracks.

Team events fail for four reasons, which I call the 4 Cs: Capability, Conflict, Courage and Collusion.

  • Capability – where the team doesn’t understand the problem and/or doesn’t have a clue what to do about it;
  • Conflict – where members of the team are at loggerheads, either because of personality clashes or opposing vested interests;
  • Courage – where no-one in the team is prepared to acknowledge either of the above and challenge their colleagues, which leads to:
  • Collusion – where everyone tacitly agrees to paper over the cracks with an inane statement that all can agree on because no-one’s position is challenged.

The result of this will be that the elephants in the room are left alone and the sleeping dogs are left to lie. None of the important issues are addressed and they are still there at next year’s away day, when the whole process starts again.

How long a management team can keep going like this depends on the organisation’s external environment. If the market is changing rapidly, if there are hostile predators or if there are far-reaching regulatory changes, the management team’s inertia may get found out fairly quickly. However, if the environment is relatively benign, an organisation can trundle on for years happily avoiding any difficult decisions.

Unfortunately, our government doesn’t have that long. The EU has already dismissed the output from its away day. Ambitious Managed Divergence also contradicts what the EU thinks the UK government agreed to in December. Essentially, Paragraph 49 of that agreement commits the government to keeping Northern Ireland in some form of customs union with the EU and Paragraph 50 commits it to preventing barriers between Northern Ireland and the rest of the UK. If you follow the logic, that means the UK staying in a customs union with the EU. The contradiction between the December agreement and the away day statement will have to come to a head soon if any progress is to be made in the rest of the negotiations.

The output from away days is often rendered irrelevant by subsequent events. That from the Chequers event may be particularly short-lived. Six months from now we will probably have forgotten all about Ambitious Managed Divergence. Another flip chart consigned to the shredder of history.

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The Good Friday Agreement: an inspired fudge

Twenty odd years ago, a former colleague of mine was about to get married. She was from Northern Ireland and, while in London, she had met an Englishman called Anthony. She described, with amusement, the polite questions from her relatives. Without asking directly, they were trying to find out whether he was a catholic. Anthony, she told me, was a name far more common among catholics than protestants in Northern Ireland.  Another friend, this one a catholic called Rory, told me of an occasion when he had been out with a mixed group of friends in Belfast at an event where he knew most of the audience would be protestants. He asked his friends to call him Roy, not Rory, as his name would immediately tell others where he was from. It worked for most of the evening until one of them forgot and shouted ‘Rory’ across the room. Fortunately it was just before last orders so they made their excuses and left.

A few years later, during a late-night conversation at a conference, we somehow got onto the subject of passports. Of the two people in our team who were from Northern Ireland, one had an Irish passport and the other didn’t. As I remarked to one of my colleagues, it was obvious which one. The one with the Gaelic-sounding name had the Irish passport, the one named after a town in Scotland didn’t. For me, the surprising thing about this was how much of it came as news to some of my other English colleagues. It’s one of the many things that people this side of the water fail to grasp about Northern Ireland. You only need one piece of information about someone to be able to infer a whole lot of other stuff. As our boss, whose family are Irish, remarked, you don’t even need to know where someone went to school. Just the name of the school will do.

At the root of all this are questions of history and national identity. Those from protestant backgrounds are more likely to see themselves as British and those from catholic backgrounds are more likely to see themselves as Irish. Matthew O’Toole summed it up neatly:

We might wish for a world in which more of Northern Ireland’s people shared a collective identity, but that is not is the world we live in. Nations are imagined communities, to use an old truism. The people of Northern Ireland have, over time, constructed separate psychological spaces for their identities. And part of the reason for enduring political instability is that neither monolithic identity can win. Both are inherently insecure.

People who feel Irish live in the island of Ireland, but not the state called Ireland. People who feel British live in the British state, but not on the island of Great Britain.

And, as he said, the Good Friday Agreement created a situation in which both were able to pretend. Northern Ireland remained legally part of the United Kingdom but the lack of a visible border meant that nationalists could imagine they lived in the same country as the people in the Republic.

The Good Friday agreement was elaborately engineered to reflect this. It not only instituted power-sharing, but created a legally enforceable right to identify as British, Irish or both. The agreement is fastidious in keeping Northern Ireland within the UK until a majority votes otherwise. But it is expansive when describing the right of people there to be part of the “Irish nation”. To make people who feel Irish relaxed about Ireland being partitioned as a matter of legal fact, the agreement sought to soften the border in people’s minds: to help them imagine it wasn’t there.

This softening of the border was enabled by the European Union and its single market. Once the single market had been implemented, there was no need for customs checks. With no customs checks, no security concerns and no immigration controls, people could cross the border as they pleased.

Some people were highly critical of the Good Friday Agreement at the time. Michael Gove wrote a blistering attack on it in 2000. He concluded:

Ulster’s future lies, ultimately, either as a Province of the United Kingdom or a united Ireland. Attempts to fudge or finesse that truth only create an ambiguity which those who profit by violence will seek to exploit.

He was absolutely right that the agreement was a fudge but, as Matthew O’Toole says, the fudge was the whole point. The ambiguity it created allowed people with different national identities to pretend they were living in the country they wanted to be in. Far from inflaming the violence, the peace process actually allowed most of the men of violence to back down with face-saving good grace. Here, the statistics speak for themselves.

From 1993, the peace process saw a gradual reduction in terrorist incidents and its culmination, the Good Friday Agreement of 1998, almost brought terrorism in Northern Ireland to an end. Michael Gove was wrong. The agreement’s ambiguity didn’t open up opportunities for violence, it closed them down.

Businesses needed no encouragement to imagine the border away. Over the next 15 years, the economies of Northern Ireland and the Republic became ever more integrated. The Republic of Ireland now accounts for around a third of Northern Ireland’s exports. According to the FT, no other part of the UK is so dependent on trade with a single country. A lot of this is due to cross-border supply chains.

All of this is now under threat from Brexit. The assumptions on which people have built their lives and their work over the last 20 years are about to be blown away. The UK government’s current position on its future relationship with the EU is incompatible with its assurances on the Irish border. As soon as the UK leaves the customs union there must be border checks. There is no magic technology option that will wish this away.

Now we have pro-Brexit politicians saying that the Good Friday Agreement is a failure or that it has outlived its usefulness. Politicians and commentators have condemned their remarks. You only have to look at what has happened to the level of violence and the level of cross border trade in Ireland to conclude that, whatever minor problems there might be with the Good Friday Agreement, it’s still better than what went before.

The trouble is, a lot of people on this side of the water don’t really understand why it’s a big issue. Irish commentators are outraged and incredulous at the actions of the British government and the utterances of some of its politicians but the border question gets a lot less air time over here. It was barely discussed during the referendum. What some Irish people see as British aggression is, these days, simply lazy indifference. Since the IRA stopped bombing shopping centres, the English, in particular, have forgotten about Ireland. The results of Channel 4’s vox pop, asking people to draw the Irish border on a map were unsurprising. Most people hadn’t a clue where it was. Nuanced questions of identity and the importance of a constructive ambiguity that allows people to live in two different countries at the same time are likely to be lost on many people.

Unless the UK government has a sudden change of heart, it’s difficult to see how there won’t be a border between the UK and Ireland. The Irish government is already preparing for the introduction of customs checks. What happens if border customs posts go up is anybody’s guess. I have heard it said that the threat of violence has been over-hyped, that the terrorists on both sides are now mostly retired and that the country has moved on from the days of the troubles. That may be so but the border is long and difficult to police. Differing customs rules create opportunities for smuggling and where there is lucrative crime, violence usually follows. Furthermore, there are still armed groups operating and they seem to wield considerable power in some parts of the country. New grievances, like a  sudden hit to the economy, might bring new recruits. These groups only need a few  resentful young people and they are in business. The terrorism might look completely different too. Not bombs in the Arndale Centre but crippling cyber attacks on vital services.

It is true that Northern Ireland is a different place now. For many, sectarianism has lost its appeal. A return to 1970s levels of violence looks unlikely but any increase in terrorism will wreck lives. Even if there isn’t an upsurge in violence, the reappearance of a border will create misery and resentment which might play out in all sorts of unpredictable ways in years to come.

Perhaps there are aspects of the Good Friday Agreement which haven’t worked. Maybe some things that were agreed during the peace process need to be looked at again. But make no mistake, what Matthew O’Toole calls the “smudged sovereignty” of the agreement has served us well over the past 20 years. Of course it was a fudge. Everybody knows it was a fudge. But it was an inspired fudge. And it worked.


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Corporate governance and short-termism

The collapse of Carillion has brought corporate governance back into the headlines and with it the perennial questions about the short-termist nature of British business. Merryn Somerset Webb was in fine form, having a go at managers, analysts and shareholders alike; “short-termism at its worst”.

The collapse of construction and support-services group Carillion has left a lot of people with a lot of explaining to do. First up, the UK’s equity analysts. Even in 2015, says the Financial Times, two-thirds rated Carillion’s shares a buy – despite warning signs in its accounts. The managers are also in the firing line. Why on earth were they taking huge bonuses in the face of a failure they surely saw coming? Why did they take on so much debt (if there is one lesson for investors here, it is to avoid companies with high levels of debt)? And why did they keep paying dividends, even as their cash-flow woes mounted?

The UK’s institutional shareholders are hardly blameless either. They bore on endlessly about how they take a long-term view – so why were they demanding those dividends from a firm that was clearly stressed? Short-termism at its worst (see this week’s cover story for more on firms who pay dividends that they probably shouldn’t).

The FT’s Capital Markets Editor Miles Johnson called it “a warning to dividend fetishists“. He too criticises analysts and Carillion’s bosses but points out that this is a symptom of a deeper problem:

Income investing has a long history in Europe, more so than in the US where investors are far more willing to support companies that pay no dividends at all. As a result, institutional shareholders in the UK have over generations created a culture of dividend worship that has pretensions to valuing long-term investment, but in fact frequently enables some of the worst forms of corporate short-termism and mismanagement.

This has led to a frequent pattern in the UK market, where companies will doggedly maintain their dividends even when their business models are under threat because of the knowledge that a cut will very frequently result in a chief executive being fired.

Over the years, a number of reports have made the link between the UK’s poor economic performance and the short-term focus of corporate executives and investors. One of the most comprehensive was John Kay’s review in 2012 which, as you might expect, met with mixed reviews from the investment industry.

It is certainly true that the UK has low levels of investment relative to other developed economies. In November, the Office for National Statistics reported that the UK was at the bottom of the OECD investment league and has been for most of the past two decades.

Looking back further, the UK’s investment relative to GDP began to fall away from that of other similar countries sometime around the early 1990s which, ironically, is when the first of a wave of corporate governance reports was produced and the framework which became our corporate governance code was created.

Source: World Bank Data

When we look specifically at research and development, the picture looks even worse. The UK has consistently invested less than other major economies. 

Chart: World Bank Data

Meanwhile, payments to shareholders have generally been higher in the UK than in other developed economies. Kyle Caldwell, the Telegraph’s personal finance reporter, remarked on this a couple of years ago, noting that payouts to shareholders as a percentage of company earnings were relatively generous. I have updated his chart with more recent data.

Apart from the recession period, UK firms have paid dividends at a higher rate than in other markets and considerably higher than in the US.

Furthermore, listed companies are a more significant part of the UK economy than most others. Market capitalisation is a crude measure as it fluctuates so much but, over time, the value of listed companies has been higher relative to GDP in the UK and US than in other large economies. (For some reason, the World Bank’s data on the UK stops at the recession. If anyone has the up-to-date figures please let me know.)

Chart: World Bank Data

The historic data on Page 15 of this University of Chicago paper suggest that a similar pattern held true for much of the last 100 years. Publicly traded companies have loomed larger in the UK economy than in most other developed economies for some time.

McKinsey’s report on short-termism in US firms last year found that those firms with a more short-term focus invested less and, over time, performed less well than those with a longer-term view. The study also found that a majority of executives believed the pressure to deliver short-term results was increasing. Andy Haldane, the Bank of England Chief Economist, reckons something similar is happening in the UK.

The other side of the coin to high pay-out ratios from internal funds is low investment. There is both direct and indirect evidence of investment having been adversely affected by short-termism on the part of either investors or managers or both.

Chart 6 shows some diagnostics for a matched sample of public and private UK companies (Davies et al (2014)). In line with US evidence, it suggests that investment is consistently and significantly higher among private than public companies with otherwise identical characteristics, relative to profits or turnover. In other words, shareholder short-termism may have had material costs for the economy, as well as for individual companies, by constraining investment.

Overall, then, there is some strong evidence that corporate short-termist behaviour is, in Andy Haldane’s words, “far from benign”. In the UK we seem to have a particularly severe case of it.

What I’m less convinced about, though, is whether corporate governance reform can do much to solve this. As Andy Haldane says, sometimes well-intentioned changes to corporate governance can have unintended consequences. The 1980s emphasis on shareholder value is a case in point:

[T]he shift to equity-based compensation practices in the 1980s and 1990s addressed one incentive friction – the principal/agent problem between shareholders and managers. But it may have done so at the expense of amplifying other incentives frictions – for example, it may have amplified risk-shifting incentives from shareholders to creditors and to wider society.

Linking the remuneration of corporate managers to shareholder value was supposed to have  reduced the risk of executives managing companies for their own gain and aligned their interest with those of  shareholders. Most observers now agree that it made the problem of short-termism worse and often didn’t work particularly well for shareholders. In 2009, Jack Welch, one of its early proponents called it “the dumbest idea in the world”.

Might something similar happen if corporate governance regime were altered to favour a broader range of stakeholders? As Stian Westlake said, reflecting on the Haldane speech, employees might prove risk-averse, preferring to save their jobs for the next few years rather than risk an investment that might only pay off years later. Likewise, customers might prefer continuity and low prices to the promise of innovative products in future.

Furthermore, while we often imagine shareholders to be individual investors, nowadays few of them are. Just as there is separation of ownership and control in companies, there is a separation of ownership and control in the investment and management of shares. Many investors have only a vague idea of which companies their fund managers are putting their money into. As the Kay review noted, in 1963 individual investors owned 54 per cent of UK firms. That figure is now around 12 percent.

The term“share ownership” is often used, but the word “ownership”must be used with care.It is necessary to distinguish:

  • Whose name is on the share register? (often a nominee)
  • For whose benefit are the shares held? (e.g. a pension fund trustee)
  • Who makes the decision to buy or hold a particular stock? (normally an asset manager)
  • Who effectively determines how the votes associated with a shareholding should be cast? (this might be an asset manager, a pension fund trustee, or a specialist proxy voting service); and
  • Who holds the economic interest in the security? (i.e. who is the saver who bears the gains and losses from investment?)

It is possible, and in fact common, for each of these rights of ownership to be held by different people.

The Kay review emphasises the need for the long-term stewardship of companies and one of its recommendations, the abolition of quarterly reporting, has already been implemented. Even so, I wonder whether the engaged investor with a long-term interest in the company is a will o’ the wisp. Sure there are some but are there enough of them? This piece by corporate governance adviser Paul Frentrop summed up the problem:

Out in the open market, cold-hearted, distant investors count on liquidity to realise the ‘outperformance’ they promised their clients. And in this harsh climate, no steward can survive.

So, yes, we do seem to have a problem with short-termism in the UK that is affecting our wider economy and the country’s long-term prospects. Carillion was en extreme example of it. But I’m not convinced that changes to the corporate governance regime, even major ones, will make much difference. After all, we have implemented a new corporate governance code every few years for the last quarter century. OK, things might be been worse if we hadn’t but, whatever else it might have achieved, the overall long-term investment picture looks pretty much as it did 20 years ago. Even our 1990s and 2000s productivity catch up may turn out to be ephemeral.

Having said all that, I’m happy to be convinced otherwise. Answers in the usual place please.

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Carillion: a one-off or a symptom of a wider malaise?

Last week’s House of Commons report on Carillion is damning. Frances has an excellent summary of it here but the key points are these.

In the words of the report, the company was borrowing without investing. Its debt increased but the value of its assets remained the same and, as its revenue declined, Carillion found it ever more difficult to service the debt.

Carillion was also ‘aggressively accounting’, which is a way of making a corporate conjuring trick sound macho:

‘Aggressive accounting’ is the practice of declaring revenue and profits based on optimistic forecasts, before the money has actually been made. All is well if the forecasts are correct. But if costs rise and revenues fall (say, because of delays and defects), expected profits turn into actual losses.

If you then pay dividends on those expected profits but the profits don’t come in, you run up even more debt.

In the eight years from 2009 to 2016, Carillion paid out £554 million in dividends, almost as much as the cash it made from operations. In the five years from 2012 to 2016, Carillion paid out £217 million more in dividends than it generated in cash from its operations.

Over the eight years from December 2009 to January 2018, the total owed by Carillion in loans increased from £242 million to an estimated £1.3 billion – more than five times the value at the beginning of the decade.

When times were good, Carillion was paying as much in dividends as it could, when things went bad, it carried on paying dividends with money it didn’t have.

And when you’re in that sort of fix, all it takes is for two or three projects to fail and you’ve had it. Which is what happened in 2017. Its debt nearly doubled in 2 years and, by the time it collapsed, it held just £29 million in cash.

As it turns out, quite a lot of people saw this coming, or at least had enough of an inkling that something was wrong to start betting against the company. In April 2017, the FT reported that Carillion had been the most shorted UK stock for 18 months. As Frances says, the rot set in some time ago:

The researchers seem to have gone back through the reports & accounts to about 2009. And they conclude that Carillion was a basket case not just in the last year of its life, but from about 2011 onwards. I’ve now done the same exercise, and I agree with them. Carillion’s cupboards were virtually bare, and the little that was in them stank.

Yet, while all this was going on, Carillion was winning accolades for building public trustethical business practices and corporate governance. Its chairman was advising David Cameron on corporate social responsibility. As the FT’s Kate Burgess said, the Carillion board ticked all the good governance boxes:

On paper, the directors looked well qualified to steer the outsourcer. As chairman, Philip Green was a former chairman of United Utilities, the UK’s largest listed water company. Not only had he run a large contracting company, he was also a fully paid-up member of the great and good as a former adviser to then prime minister David Cameron on corporate responsibility.

The directors did not lack experience, sitting on boards from Royal Dutch Shell to Premier Farnell.

Alison Horner, head of the remuneration committee, was formerly operations director at Tesco and a non-executive director of Tesco Bank. The head of the audit committee was an accountant, as were three other directors.

In 2016, the directors approved a change to the conditions under which executive bonuses could be clawed back. As the Institute of Directors remarked, this is not a good look. The FT’s city editor Jonathan Ford managed to work the term ‘looting’ into his article while stopping short of any accusations that might get the paper sued:

Carillion’s board may not have looted, but it does seem to have practised what one might call “reckless abstraction”. It sucked out cash to placate stock market investors even as executives wrote the mountain of under-priced contracts that ultimately buried the business, triggering a £1.2bn writedown in the second half of last year.

In the five years to 2016, the directors recommended paying £357m of dividends to shareholders, despite generating just £159m of cash from operations. Over the same period, the bonuses for the two top executives climbed from nothing to more than £1m a year in 2016.

Inevitably, people are asking questions about corporate governance. It is 25 years since the Cadbury Review, set up after the collapse of BCCI and Polly Peck, led to the creation of the UK’s corporate governance framework. Since then, there have been numerous reports and the code has been amended every few years. Yet, every so often, someone trousers a large amount of money from a massively indebted company, leaving shareholders, employees, pensioners and creditors to take the hit. After a quarter of a century’s corporate governance reform, the scandalous company failures are still happening. Would the recent proposed reforms to the corporate governance code have saved Carillion? It’s difficult to say, writes corporate lawyer Sophie Brookes:

[W]hether the new corporate governance code would have prevented the collapse is unclear. Ultimately, the new requirements will only bite if shareholders and investors are prepared to step in and hold boards to account.

As ever, the system is only as good as the people operating it.

Perhaps it is unfair to expect the corporate governance framework to prevent the occasional corporate collapse. It could be that it is like the drains; most of the time it works well and we only notice when it fails somewhere and a foul stink erupts. It may be that most non-exec directors and active shareholders are doing a good job holding their executives to account and we would be worse off without them.

Or could it be that there are a lot more firms like Carillion which are only getting away with similar practices because no-one has twigged yet. As Kate Burgess says:

It is worrying to think the construction company’s board was such a model of good governance. If the line up had been different, would another cast of characters have done any better?

And how many other supposedly well-run boards are presiding over impending corporate disasters elsewhere?

Meanwhile, the astonishing revelations about Carillion continue.

There will, no doubt, be more of this to come over the next few weeks and months.

A peculiarly badly managed one-off, sunk by a perfect storm of unfortunate circumstances? Or a symptom of something deeply wrong with the way UK companies are governed?  Whatever happens, Carillion will probably provide the impetus for further corporate governance reform. Whether that will stop something similar happening in future is anyone’s guess.


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Have we fallen out of love with private sector contractors?

Is the collapse of Carillion a watershed moment? Robert Peston thinks so:

Carillion’s collapse marks the end of a 25-year love affair between Tory and New Labour governments on the one hand and private-sector service providers on the other.

Could this be the point at which political opinion turns against the private sector provision of public services? And, if so, is it simply catching up with where the voters have been for some time?

In the mid-1990s, I went to see Tony Blair speak at Brenford Fountain Leisure Centre. The first question from the floor was about renationalising the railways and utilities. Labour’s new leader dismissed the idea, essentially saying that it was never going to happen and that there were far more important things on which a new Labour government would need to focus its energy and resources.With that the conversation moved on.

And that was pretty much how things went for the next two decades. In his dismissal of denationalisation, Tony Blair was simply reflecting the prevailing political orthodoxy which arose during the Thatcher years. The government was to do less and the private sector was to do more. That was the way the world was going. Light-touch regulation and the privatisation of public services would be the order of the day whoever was in power.

Recent years, though, there seem to be signs that the voters are not altogether happy with this state of affairs. The Guardian’s Andy Beckett declared last summer that Britain had fallen out of love with the free market. Here he quotes IEA director Mark Littlewood:

Amid all the current political turmoil in Britain and the wider world, the shift against free markets has yet to register fully with much of the media or many voters. But the most ardent neoliberals have noticed. “Free marketeers have been gobsmacked,” says Mark Littlewood, director of the Institute of Economic Affairs, which has supplied British politicians with pro-capitalist arguments for 62 years. “Things we thought of as like the laws of gravity are now up for grabs.”

Equally gobsmacked was the Legatum Institute. “The capitalism ‘brand’ is in crisis,” it said after its joint research with Populus found significant support for stronger business regulation and the re-nationalisation of utilities and railway companies. Nor can this be dismissed as the idealism of young people who can’t remember how bad things were in the 1970s. These views are fairly evenly spread. (The full list is on pages 15-18 of the report.)

These views also cross the traditional left-right divide. A YouGov survey found that the proportion of UKIP voters supporting re-nationalisation was around 75 percent. There was even a narrow majority among Tory voters.

There is also evidence to suggest that voters have a negative view of big business. Research by the Edelman Trust and IpsosMORI reported low levels of trust in large corporations and the people who run them. However, this “unprecedented crisis of trust” seems to apply across western economies and to most institutions and authority figures. According to Edelman’s recent figures, business hasn’t fared much worse than anyone else.

Ipsos MORI data records a sharp fall in the proportion of people who think company profits make things better for their customers but this decline goes back to the 1980s and has held fairly steady ever since.

Chart by Ipsos MORI Reputation Centre

YouGov data also shows the level of trust in people who run large companies to be consistently low (around 20-25 percent) since 2003. Contrast that with journalists whose reputation has collapsed over the past 15 years.

There are a couple of questions on the British Social Attitudes survey which go back to the 1980s and enable us to track broad anti-corporatist sentiments. (Thanks to Harry Carr at Sky News for these charts.)

This suggests that a majority of people have a negative view of corporate behaviour and have done for some time. With some fluctuations, these numbers have held fairly steady since the 1980s.

The 2015 British Social Attitudes survey found similar levels of anti-big business feeling among UKIP and Labour voters.

The BSA also has some data on attitudes to nationalisation although, for some reason, it stopped asking the question in 2009.

This shows a balance of opinion in favour of state ownership but nowhere near as high as that found in the more recent surveys.

This data leads to three tentative conclusions:

  1. People in the UK have had a negative view of big corporations and those that run them for some time. This goes back to the 1980s and the financial crisis and recent corporate scandals don’t seem to have changed it either way.
  2. People were never that keen on privatisation. They may have bought shares in privatised companies but that didn’t mean they thought it was good idea in principle.
  3. There seems (going by the gap between the BSA and the more recent YouGov and Legatum findings) to have been a rise in support for re-nationalisation in the last five years or so.

Which raises a broader question, is this a shift in public opinion about private sector public service provision or does it reflect a deeper and more long-term anti-corporate sentiment that has only recently found its political expression? Is the collapse of Carillion really a pivotal event or has it just come at a time when political opposition to privatisation was finding its voice? Was it the last straw it did it just confirm the beliefs of many voters that a lot of things shouldn’t have been privatised in the fist place?

Whatever happens next it is likely that governments will find a lot more public attention on the private provision of public services. Further privatisations will almost certainly meet stiff resistance, as the plans to privatise the Land Registry and Ordnance Survey already have. My guess is that this would probably have happened anyway regardless of whether or not Carilllion had crashed. Where I think Robert Peston is probably right is that private sector service provision has peaked. Whatever the rights and wrongs of privatisation, governments will be faced with a lot more public hostility to it than they have seen for the past few decades.

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Breaking the Overton Window

An FT editorial declared last year that divisions between left and right no longer explain how voters think. In September Intelligence Squared ran a debate on Britain’s Political Identity Crisis and the dissolving of left and right into new political tribes. There is much talk of realignment in British politics.

One of the most useful contributions to the debate was this chart published just before Christmas by the FT’s John Burn-Murdoch and Sebastian Payne, based on data from the British Election Survey. It plots voters on two axes according to their attitudes. The horizontal axis is the traditional left-right split, based on issues like income distribution, taxation and the behaviour of big business. The vertical axis maps social attitudes to things like the death penalty, crime, school discipline and traditional British values.

As you might expect, it shows a large number of voters following something like the traditional two-party positions; for the Conservative voters, right-wing on economic issues and socially conservative on cultural issues, for Labour voters, the opposite. However there is also a significant chunk in the top left hand corner, containing both Labour and Conservative voters who are left-wing on economic issues yet more conservative on cultural questions.


Jon Mellon and Chris Prosser from the BES team discussed this in a paper they published last September. They found that, unlike the voters, most parliamentary candidates from the major parties fitted into the classic party positions. Plotted on a similar scale, their stated positions showed the Labour candidates falling into the bottom left quadrant, economically left and socially liberal, while the Conservative candidates clustered towards the top left quadrant, economically right and socially conservative.

There is, then, a group of voters in the top left quadrant not really represented by anyone. Furthermore, as Mellon and Prosser note, these voters are predominantly working class.

Something else happened in over the last thirty years though. The Overton Window, that range of policies that politicians and commentators deem to be politically acceptable, moved towards the bottom right. It was as though a deal had been struck; you can have diversity, minority rights and discrimination laws if we can have privatisation, deregulation and tax cuts. The effect of this was to take policies that were popular with the public off the agenda on the grounds that they were publicly unacceptable. Politicians proposing renationalisation and high taxes on the rich or the restoration of capital punishment and cuts to immigration tended to be dismissed as eccentric, even though many voters were in favour of such things.

As American political scientist Alan Wolfe said:

The right won the economic war, the left won the cultural war.

Or, as David Goodhart put it, the two liberalisms won, the economic liberalism of the right and the social liberalism of the left:

What if a lot of people feel that there’s no point in voting because whoever you vote for you get the same old mix of economic liberalism and social liberalism – Margaret Thatcher tempered by Roy Jenkins.

The two liberalisms – the 1960s (social) and 1980s (economic) – have dominated politics for a generation.

Even during the Thatcher period, when economic policies shifted to the right, the liberal policies initiated during the 1960s, and the social changes that went with them, continued apace. Conservative politicians may have railed against ‘political correctness’ but they didn’t do much about it. Racist and sexist language that would have passed unremarked in 1979 was considered unacceptable by the time John Major left office. Corporal punishment in schools was abolished under Margaret Thatcher and, while there was much tough talk on immigration, her government did little to change the existing laws. The Conservatives even shied away from illiberal legislation that would have been overwhelmingly popular, such as the re-introduction of capital punishment. Voters might have thought they were voting for socially conservative policies but what they got was economic liberalism.

If the right had quietly abandoned the culture war the left seemed to do something similar with the economic war. By and large, Labour under Tony Blair accepted privatisation and de-regulation. It tried, with some success, to mitigate the rise in economic inequality by using redistributive taxes and benefits while advancing its socially liberal agenda. Its Equality Act in 2010 said very little about economic equality. As Peter Mandelson might have said, the Labour government didn’t mind people getting filthy rich provided they had the right equality and diversity policies in place.

All of which meant that politics began to drift away from some working class voters. Voters who were socially liberal or economically on the right got at least some of that they wanted. Those in the top left quadrant were quietly ignored.

A YouGov poll in 2015 found majority support for both “radical left” and “radical right” policies. Policies that might be dismissed in the broadsheets as unworkable or even a bit bonkers were actually quite popular.

The survey also found that all policies except for workers on boards had majority support among UKIP voters. Perhaps more surprisingly, between 40 and 50 percent of Conservative voters backed the ‘radical left’ policies and a majority of Labour voters were in favour of the suggestions on benefit cuts and ending parole for murderers.

The accompanying commentary said:

All of this points to a contemporary mindset that defies traditional classification. It is possible for the same people to believe several things at the same time which come from opposite ends of the traditional ‘political spectrum’.

Most tellingly, although 63% of British people are at least fairly clear on what is meant by the left/right terms, the largest group (43%) say they don’t think of their views as being right or left wing.

Is this really a contemporary mindset, though, or just one that was ignored for years? My grandfather would not have found any of this at all strange. A former soldier, miner and trade union activist, he believed in nationalisation, workers’ rights and the welfare state, while also having a low opinion of ‘shirkers’ and a slight mistrust of foreigners. He would not hear a word said against the royal family or the armed forces. Every profile I read of union leader Bob Crow remarked on the fact that a left-wing firebrand such as he was also in favour of the death penalty. In that, I suspect, he was not that far away from many of the people he represented.

Support for the death penalty was, as Eric Kaufmann pointed out, strongly correlated with Brexit voting intention. He argued that the Brexit vote was primarily about values, with the EU referendum providing an issue around which those with socially conservative values coalesced. That can be seen on John Burn-Murdoch’s chart, with the block of Leave voters spreading across the left-right divide but concentrated mostly on the authoritarian side of the chart.

I think Resolution Foundation Director Torsten Bell had it about right when he observed that many of the Leave voting areas had been left behind economically decades ago but that there was a cultural aspect to the vote too:

[T]his isn’t just about the numbers – it’s about culture, outlook, lifestyle and what we feel a sense of belonging to. That might not be the normal thing for an economic research organisation to say, but it’s true. And it’s also, as many people noted last night, a function of the coalition that underpinned the leave vote – shire Tories combined with Britain’s industrial heartlands. In a sense, though, this is simply a different sort of left-behindness. Left behind by the shift in the cultural zeitgeist as well as the economic changes.

Those in that top left quadrant had suffered economically and, at the same time, the prevailing political culture had gradually moved away from them. The referendum gave them a chance to upset the apple cart and they took it.

This leaves the main political parties with a problem. Doing what they have done for the past few decades isn’t going to cut it any more. Their dilemma is made more difficult because, when you start unpacking some of these political and cultural attitudes, there is yet more nuance. Take something like social conservatism. Acceptance of same-sex relationships has increased significantly over the past half decade or so, especially among people describing themselves as Christians. In contrast, attitudes to race and ethnicity have not moved as much. British Social Attitudes data suggest that people are a little less racially prejudiced than they were 30 years ago but the report contrasts this with the sharp drop in homophobia. Simon Hix, Eric Kaufmann and Thomas Leeper found that, for all the referendum rhetoric, voters were actually more concerned about non-EU migration than migrants from inside the EU.

A study by Populus for the Legatum Institute in last September looked at several aspects of social liberalism. It found, as you might expect, that younger voters were more socially liberal. Here, again, the general acceptance of same sex relationships shows up but the attitude to crime is also interesting. Younger voters, on balance, want tougher punishment for criminals and a more order society.

The same study, much to the disappointment of its sponsors, found significant support for renationalising transport and utilities and a generally unfavourable view of capitalism. Nationalisation found majority support among Conservative voters and across all age groups. The suggestion from some Tories that renewed support for nationalisation comes from young Corbynistas who can’t remember how bad things were in the 1970s doesn’t really stack up.

When it comes to the corporations and the labour market, there is little to cheer the deregulators. The light-touch approach of the last three decades is no longer popular with the voters, if indeed it ever was. Peter Mandelson might be relaxed about people getting filthy rich but the majority of people, it seems, disagree.

The common theme emerging here is that people want the government to do more. Whether it’s about crime and immigration or stopping profiteering and ensuring greater equality, the underlying theme in all of this is a desire for more government action.

This is why I think it is unlikely that post-Brexit Britain will become the deregulated shrunken state that many of those who bankrolled and ran the Leave campaign hoped for. It does raise the question, though, about what politics might look like in the next decade. The Brexit vote revived the idea that people can actually change things by voting and the surprise result of the last election suggests that voters might be getting the message.

It’s tempting to look at the data from the surveys I have covered in this post and conclude that a party advocating greater state intervention in the economy together with a crackdown on crime, curbs on immigration but with a liberal attitude to sexuality and soft drugs might be onto a winner. Something like a British Pim Fortuyn, perhaps. Politics is more complex than that, though, and a first-past-the-post parliamentary system without a directly elected presidency is the most hostile environment for insurgent parties. Ironically. UKIP only made the headway it did because of the proportional system in the European Parliament.

Nevertheless, those who talk of realignment are right in that the Conservative and Labour parties will almost certainly have to shift the positions they have held for the last few decades. The voters have started to break the Overton Window. It will be interesting to see what they let in.


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