Editorial - The New Corporatism

In the wreckage of the 2009 financial crash, many thought ‘business as usual’ would become immediately unsustainable. The financial sector’s collapse epitomised the failure of big, unregulated business, driven by short-term profit at the expense of the long-term interests of the business, and of society. The impact and anger it precipitated were not limited to those on the margins of society, but spread to savers, the young and people entering the job market. Few were truly insulated from its ruinous consequences. The idea of continued support for previous business othodoxy seemed untenable.

Yet the rebirth of business has long been in gestation. Bar some notable exceptions – such as new regulation, and warm rhetoric about corporate responsibility – ‘business as usual’ has proven resilient to date, even in the face of sometimes ferocious political criticism.

How long can or should this hold? 12 years on from the crash, four interrelated trends continue to challenge decades of mainstream consensus on the role of business, on viable business models, and on the purpose of profit.

THE DOMINANT BUSINESS MODEL IS NOT DELIVERING RISING, SHARED PROSPERITY

The UK’s fundamental economic performance is worrying. On investment, research and development (R&D), trade, and productivity, the UK performs worse than most of our European neighbours, and has done for much of the last 40 years.¹

“We now have an economy where the richest six people in the country own as much wealth as the bottom 13 million”

One driver of this is underinvestment by businesses, harming productivity and consequently wage growth. The UK is close to the bottom of the OECD league table for investment.² The combination of strong market forces and the lack of a counterbalancing strong regulatory framework push businesses into chasing short-term profit over long-term growth. Market concentration is up,³ productivity growth is weak,⁴ and a far larger share of lending is going into unproductive assets like housing than into productive investment.⁵

‘BUSINESS AS USUAL’ HAS CONTRIBUTED TO GROWING INEQUALITY

Inequality in the UK rose markedly in the 1980s and has stayed at a similar level since. We now have an economy where the richest six people in the country own as much wealth as the bottom 13 million.⁶ Simply, the gains of the economy are unequally distributed. Part of this story is that shareholders and executives are capturing an increasing portion of the rewards. Just as corporate investment has fallen over the past thirty years, shareholder returns have increased.⁷ While in the 1980s, a typical top chief executive (CEO) in the UK was paid approximately 20 times as much as the average worker; in 2016, the average pay ratio between FTSE 100 CEOs and their employees was 129 to one.⁸

Over the same period, connections deepened between the UK and the global economy, causing the structure and geography of the economy to change. The centre of gravity shifted from more evenly spread industries to the more geographically concentrated service sector. But corresponding steps were not taken to ensure that the opportunities and benefits of the new economy were shared by all. Instead of acting as an engine for the rest of the economy, London and the South East are disconnected from it.⁹

FAITH IN DEMOCRACY HAS CRUMBLED

As globalisation has increased, the ties between business and the community have weakened. In turn, workers in the UK feel less in control both over their own economic circumstances, and those of the country as a whole. As Joseph Stiglitz and others have argued elsewhere, one consequence has been a loosening of faith in democracy.¹⁰ The consensus had been that democracy provided people control over their lives. The reality for many has been a sense of total powerlessness at the hands of politicians they have returned. In the face of this, it is unsurprising that people are looking for alternatives.

“Both businesses and the financial sector that shapes our future economy have failed to internalise or value the environment properly”

This mood has fed into a rise in radical right-wing views, both here and in Europe.^11,12 Their proponents preach anger at the establishment, a mistrust of experts and a suspicion of evidence. Right-wing voices propose an alternative rooted in nostalgia for the country, as it supposedly once was: harsher law and order, harder restrictions on immigration, ‘take back control’, ‘make America great again’. As Cas Mudde writes in this issue, there has been a fourth wave rise of the post-war far right.

THE BACKDROP OF GLOBAL CLIMATE CRISIS MEANS CHANGE MUST BE URGENT

The climate crisis – alongside broader ecological and environmental breakdown – exposes deep flaws in current market structures. Both businesses and the financial sector that shapes our future economy have failed to internalise or value the environment properly. Short-term profit still dominates the priorities of CEOs, boards and shareholders.

As political and policy ambition begins to ratchet up to meet the UK’s net- zero emissions target, the challenge for business is to survive in the in- between space: between profit and environmentally and ecologically sustainable boundaries. This demands an end to the growth-at-all-costs approach, and societally-imposed limits to level the playing field between the scrupulous businesses and their competitors.

As Bethan Livesey argues here, one route forward is fundamental change to the rules and the culture of modern business. If shareholders agitate and governments act to change the guidelines that govern business investment, then environmental cost and benefit will be given greater weight. Profit will still be possible, but the underpinning calculations will skew towards more long-term and environmental projects.

“Purposeful businesses will be essential contributors to solving the global challenges of the 21st century”

Beyond the boardroom, climate crisis will further disrupt the types of jobs and skills required for employees up and down the country. As Beth Farhat writes, treading carefully but firmly is necessary to ensure that the transition to a greener future – which more carbon-intensive industries must undergo – protects not just jobs, but also job quality. In this transition, the relationship between government, employers, employees, trade unions and communities will be paramount.

ALL IS NOT LOST, BUT THE CHANGE MUST BE FUNDAMENTAL

A new model for business can still be imagined, crafted, and brought into being. While certain business models have a logic of exploitative, environmentally irresponsible corporate behaviour, there are also encouraging signs of just business within the UK. For example, the ‘solidarity economy’ has spread throughout Oxford, via swap shops, childcare groups and housing cooperatives creating a community-owned economy.¹³ Led by Preston Council, the ‘Preston model’ has empowered local small businesses and social enterprises to bid for contracts, directing substantial sums back into the local economy. Employee ownership – or ‘the John Lewis’ economy – is growing. The sector was worth £37.7 billion in 2019, compared to £36.3 billion in 2016.

More widely, we have entered a moment of reflection on the purpose of business – a moment not only led by outriders, but also by civil society, academics and members of the business community itself. As the British Academy’s landmark review of the future of the corporation put in in October last year: “Purposeful businesses will be essential contributors to solving the global challenges of the 21st century, best expressed in an integrated way by the UN sustainable development goals”.¹⁴

Larry Fink, the CEO of BlackRock, the world’s largest asset manager, has argued that: “the long-term health of free enterprise capitalism will depend on delivering profit with purpose”, while the Financial Times, amongst others, have in recent campaigns asked the fundamental question: what is business for? In doing so, they recognise that the business world will need to change if it is to save capitalism from itself.

As we enter a new decade, the world looks very different to 2010. Critiques of business as usual have spread beyond outriders to insiders. To realise the seismic shift in business practices we need, and end business as usual as it is still practised by big financial, oil or tobacco companies, progressives should cohere critique with a compelling vision for what business can and should be for. That will require nuance and a real understanding of business as well as radicalism.

“2020 may be one of the defining elections in American history”

This vision must be based on a new contract between government, employees, business and the environment. This issue of Progressive Review explores the boundaries and shape of such a vision.

Sam Mitha explores how tax avoidance has been supported by the ideology underpinning government’s approach to business over the last fifty years, and how we can better capture a fair contribution from all businesses in the decade to come. Helen Mercer and Dexter Whitfield analyse the failings in how government and the private sector have partnered in the past – in cases like public-private partnerships (PPP) and the private finance initiative (PFI) – and provide practical steps we can now take.