By Christine Berry
There was no shortage of meat in Vince Cable’s speech to Liberal Democrat conference today, with the announcement of a British Investment Bank and the declaration that the economy needs a Keynesian demand stimulus. But just as interesting as the substance was the framing: Cable described his proposals as being founded on "a will to fight the British curse of short-termism", emphasising that they were "part of a bigger project to build a more responsible capitalism".
Cable first set out his stall on 'responsible capitalism' exactly one year ago. For much of the period since, there has been a remarkable degree of political consensus on the need to tackle irresponsible behaviour, with a particular focus on excessive executive pay. More recently, Cable has come under fire from those who view this agenda as a distraction from his department's immediate task of creating jobs and growth. Yet today saw him sticking to his guns, defending responsible capitalism not as an irrelevant sideshow to economic recovery but as an integral part of it. He is right to do so, for at least two reasons.
Firstly, this agenda has the potential to fix some of the problems that got us into this economic mess in the first place. In today’s speech, Cable spoke of a "mirage of growth based on property speculation and financial gambling that has hidden the harder virtues of making things productive". It's no accident that this line garnered one of the biggest rounds of applause from delegates: there is a growing sense of unease that we have not learnt the lessons of the financial crisis. The risky lending and irresponsible business practices that caused the crisis were driven by an investment system that relentlessly prioritised short-term profit. Institutional shareholders not only failed to rein in these risky practices: they actively encouraged and even demanded them. Available figures suggest that only one major UK asset manager voted against RBS' disastrous takeover of ABN/Amro; only one other abstained. The Kay Review of UK equity markets, which reported in July, was commissioned by Cable to address precisely these issues.
Secondly, in an era of public spending constraints, it's even more important that savings are translated into productive investment. As the RBS example forcefully demonstrates, the 'mirage' of growth based on speculation was by no means confined to banks. All too often, it has extended to institutional investors as well – including the institutions that manage our pensions and other long-term savings. Savers have an obvious interest in economic recovery, in sustainable wealth creation, and in companies having the confidence to invest for the long-term. But somewhere between savers and the companies their money is invested in, this common-sense connection breaks down. If that connection can be re-established, the potential economic benefits are enormous: UK occupational pension funds alone represent around £1,900 billion of capital.
This is not about victimising companies or branding the people making investment decisions as somehow morally corrupt. Nor is it about the wagging finger of the state penalising individual companies for being 'irresponsible', as its opponents often seek to caricature it. It's about recognising structural factors – misaligned incentives and broken links of accountability – that drive perverse outcomes. The collapse of RBS was good for nobody – not for the shareholders, not for society, not for the company itself. An investment system that pressured and incentivised actors at every level to bring about such an outcome is clearly a broken system. At its best, the responsible capitalism agenda goes far beyond executive pay – it's about building a different, more resilient, more sustainable economy, and it's something all responsible businesses should embrace.
Christine Berry is FairPensions’ head of policy and research. She leads the organisation’s public policy engagement. She joined FairPensions in March 2010, having previously worked as a parliamentary researcher. She has also overseen a variety of environmental and investment-related campaigns.
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