Written in the wake of financial turmoil, economic freefall, spectacular profiteering by MPs and abuse of corporate power, our piece last July glimpsed the possibility of a chastened society working towards reordered priorities. It raised a hope that the market-based system might retrieve some of its tarnished credentials and investors recover some reasonable expectation that business and enterprise would be allowed to earn its proper reward. Ten months on, the question for investors is whether the result of the general election brings nearer this possibility.
This is not just a question for UK-based investors. Investors overseas may care to cast more than a fleeting glance at recent events in Britain. For the mood of mistrust crystallised here in a poll of a mere 40 million or so reflects a disillusionment that is broadly shared by the whole constituency of Western nations. Given the prevailing mood, most investors must be anxious. They will look at the recent meteoric recovery in global stock markets and wonder whether it will prove justified by a more responsible and sustainable share-out of the benefits of a mixed economy, or whether a pall of mistrust will continue to hang overhead, like a cloud of volcanic ash, darkening any vision of a better order.
In Britain, the Augean Stables that was Westminster have been cleansed. A fresh intake of untainted representatives has the opportunity to re-establish parliament’s authority as servant of the people. 232 new MPs must know that they have to earn the people’s trust. They know that voters have swallowed too many disappointments and can no longer be fobbed off with self-serving rhetoric and statistical trickery.
Change also looms large on the business horizon. But a few weeks ago the British prime minister of the day observed, ruefully, that he “should not have listened to special interests. You do not listen to industry when they say ‘this is good for us’. You have got to talk about the whole public interest”. That was Gordon Brown but he was echoing the mood of the American president too. Like it or not business, especially the financial sector, has its back to the wall. Unless it adapts itself to changed political priorities, big businesses will be crushed beneath the heavy roller of public frustration. All business leaders, not just those in the financial sector, will need to set different priorities, re-orientate their whole approach to business if they are to begin to recapture the trust of their customers.
In particular they need to re-examine whether a single-minded focus on financial returns at the expense of customer satisfaction serves shareholders or indeed themselves well in the longer term. They have to face the fact that a narrow view of their corporate responsibility may be unsustainable today. Goldman Sachs’s recent exchange with Congressional leaders in the USA gives a flavour of the shortcomings yet to be fully acknowledged and the adjustments required.
In planning how to adapt themselves, big-business executives might well reflect on the experience of successful smaller companies. Smaller firms, including this one, know that their survival and prosperity depend on keeping the requirements of their customers in close focus. When customers (and clients) feel that they come first, they feel well served. And when they feel well served, trust gets built. As a firm’s reputation grows and goodwill spreads out, all concerned benefit.
At first glance the usefulness of these homespun, possibly smug observations may appear limited so far as they can be applied to big business. After all, global companies cannot develop relationships with hundreds of thousands of individual customers but can only deal with their clientêle collectively. Business plans deal with numbers not people. And yet some big businesses such as John Lewis and various components of the Co-operative organisation do manage to command the respect and trust of most of their individual customers. These organisations have no external shareholders – their only stakeholders are their customers and their staff.
Even then, simply satisfying customers’ most pressing need, though necessary, does not suffice to sustain their trust. Tesco would quickly alienate swathes of customers were it only to offer cheap produce supplied under exploitative conditions from powerless third-world farmers. Integrity must be seen to run through the whole business approach if trust is to endure. Mere adherence to the rules tips any sense of personal responsibility into an ethical black hole. What is under the surface, what lies behind the corporate façade matters. If in the light of day it doesn’t stack up with customers’ expectations, disillusionment is all the greater. Judging by the number of global businesses fessing up to past inadequacies, that is a lesson beginning to be learned by company bosses – not least those of Toyota, the world’s biggest car company: “I am deeply sorry… will work unceasingly to restore the trust of our customers” (Akio Toyoda, CEO).
But commitment to a ‘change’ agenda, whether to secure political or business objectives, may still prove inadequate, as President Obama has learnt, unless it is linked to a hard-headed practical grasp. Medical care for all Americans cannot be made available if there is nobody left willing or able to pay the bills for it. Similarly, popular clamour in Britain, France, and elsewhere to redress economic imbalances, to slim down the fat cats, to discipline executives should be tempered by the need to sustain and encourage the entrepreneurial spirit that invigorates the whole economy.
Fortunately for UK and overseas investors alike, trust has become a global commodity. Virtually every nation’s economic fate hangs on the instant judgement of world markets. Fiscal credibility that may have taken years – even centuries – to establish can be shredded within weeks by foreign exchange dealers and credit agencies, as Greece and its weaker European partners have discovered. That is why Britain’s new government must acknowledge that its first priority is to shore up international confidence in this country’s intent and capacity to pay its way. So catastrophic would be the damage from failure, so hurtful the impact of national bankruptcy that one can be reasonably sure it won’t be allowed to happen. The necessary fiscal adjustments will be spelled out and followed through. Nothing less will satisfy our creditors.
In Britain, fiscal retrenchment will mean higher interest rates as the supply of credit gets shrunk. That is the price of return to economic discipline. But the process need do little harm to the productive capacity of the economy provided the new government takes a pragmatic approach to the private sector and does not let any ideological legacy or the force of popular resentment smother its earning power. Investors here have a backstop since over 60% of the profits of UK companies are earned overseas.
On balance, therefore, investors can expect the combination of a chastened, more responsible, customer-conscious business sector, and a government constrained by domestic disillusionment and global mistrust, to work in their favour. If only under force majeure, political and business leaders in the UK, as elsewhere, are being obliged to plan their undertakings on a basis that regenerates the trust of all their stakeholders whether they are customers, creditors, or the people at large.
World equity markets have risen over the past 14 months in anticipation of the recovery in company profits and dividends now underway. But if investors’ confidence is to be sustained, it will not be by some Utopian vision of uninterrupted recovery but by an appreciation that we are at the start of a forced march along the road to clearer and more honest dealing between political and business leaders and the rest of us. If progress along that road continues to raise confidence in the system as a whole, as it must, the value of financial markets will continue to rise with it. The 2010 UK general election, like none before it, shows that the British people, at least, want to see that journey completed.
11 May 2010