Examination of Witness (Questions 1-36)
PROFESSOR CHRISTOPHER
BONES
12 JANUARY 2010
Q1 Chairman: Professor Bones, welcome
to this one-off evidence session which has the title "Company
takeovers, mergers and acquisitions" but whose context is
Kraft's bid for Cadbury which has prompted our interest in a subject
to which politicians have given much attention over the years.
We are very grateful to you for coming before us at our request.
You are an academic who takes an interest in these issues but
you also have a close personal interest in the affairs of Cadbury.
It may be helpful if we first invite you to explain your involvement
with and interest in Cadbury.
Professor Bones:
Clearly, I am a former employee of Cadbury Schweppes, as it then
was. I stepped down in 2004 to take my current job as head of
the business school. I am still a shareholder in Cadbury Schweppes.
I have 5,000 shares and I am a deferred pensioner so I have an
interest in this.
Q2 Chairman: When I invited you to
participate in this session I did not know that, but I think it
will help rather than hinder the Committee. It gives them a perspective
which they will find very valuable. Perhaps I may say how grateful
I am for your thoughtful and helpful written evidence. As a West
Midlands MP myself I look at the specifics of Cadbury and ultimately
the general underlying principles which may also be important
in the future. In your paper you argue that the closure of Cadbury's
plants in Birmingham and Sheffield would have a wide and damaging
effect on manufacturing in those areas and, I might add, to some
of the agricultural interests in that locality. Can you expand
on the specific concerns for the wider manufacturing base?
Professor Bones: Manufacturing
for any international business is now a matter of cost and management
control. Inevitably, particularly for those companies that can
manufacture in different countries decisions are made that offset
cost alongside the skill and expertise. Cadbury's strategy has
been to maintain skill bases in Birmingham and Sheffield, the
former around its chocolate production and the latter around its
sugar activity, and it has built a need for critical skills in
engineering, manufacturing, planning, procurement and so on in
both areas. They took the strategic decision to step away from
production in the Bath factory because of the scale of investment
required to bring it up to modern standards and felt that that
production could be done elsewhere—Poland—for cost
reasons whilst protecting the expertise base in the West Midlands
and South Yorkshire. Cadbury is not in the top 25 employers in
the West Midlands but probably about 1% of the workforce is engaged
in Cadbury and its related activities such as tourism. They are
mainly in production/manufacturing and the global head office
where procurement and so on take place. One is looking at a sizeable
strategic investment. They have probably put a few hundred million
pounds into Bournville over the past 10 to 15 years, so it
is a substantial investment site. My concern is two-fold. If in
fairness perhaps a lower performing, some might say a nil growth,
conglomerate is to come in and through a leveraged acquisition
buy a successful British business clearly for that conglomerate
the solution will be about taking out cost, not growing the business
better and faster. It is quite obvious from Cadbury's figures
this morning that their own efforts are quite substantial. I cannot
see the growth claimed for the acquisition. If it is about cost
then the manufacturing, research and skills base in the UK comes
under threat again because it is easier to take cost out in a
foreign market than in a domestic market. Kraft would understand
that just as much as anybody else. I have fears for manufacturing
generally. I have said in my written evidence that whilst all
good intentions are spoken about in the process of an acquisition
the track record intriguingly for Kraft was to shut the Terry's
of York factory and move production—surprise, surprise—to
Poland. Therefore, I do not look at the acquisition commitments
perhaps with a great deal of credibility in terms of the comments
made for the long term, but I appreciate that this time the circumstances
may be different.
Q3 Chairman: The existing legislative
framework under which the Department, Competition Commission and
OFT act is laid down very clearly and defines some strategic interests
that can be taken into account when mergers are being considered
in specific sectors, for example defence and the media. Those
provisions have been used in the defence sector on a number of
occasions. Is it possible to take any kind of formal legislative
account of strategic manufacturing and skills when major companies
are subject to takeovers? Is that a sensible approach?
Professor Bones: I respond in
two ways. This is not an anti-market rant. Ultimately, the market,
imperfect as it is, is the best mechanism we have for allocating
resources efficiently, so this is not about "You shouldn't"
or "You can't". But where a bid is made for a successful
unit, as opposed to a failing one—in this case it is intriguing
that we see a successful company under pressure—if that
company has assets that are of critical importance to the future
growth of the United Kingdom, which this one does particularly
in research and development, for example my own university campus
at Reading and in engineering critical mass certainly in the West
Midlands, there should be provision for the Government to impose
conditions on such an acquisition should it go through. I do not
believe it should intervene on whether or not the company is acquired
because that is a decision for shareholders, subject to them having
a say, but we could ask for conditions to be placed on the investment
to protect skills and the long-term requirements of the UK economy.
Q4 Chairman: Would that require new
legislation?
Professor Bones: As I said in
my written evidence, it depends on how you define the national
interest. I suspect it would require some interpretation of the
current regulations. It may well require legislation but I am
not an expert on the law.
Q5 Chairman: You do not believe that
the possible disadvantages of what will be seen by some as a protectionist
move would outweigh the advantages of the protection of the R&D
and manufacturing base?
Professor Bones: Perhaps you could
argue that it is a more sophisticated way of thinking about national
champions. I do not believe that national champions as a strategy
is a particularly good one; it is protectionist, but there are
national skill requirements and a critical mass of skills and
capabilities particularly in the knowledge economy where we wish
to compete successfully and where the Government could say to
a particular company that it is happy for it to acquire another
company but it will impose some conditions. It may be that if
you want cost savings you will not get them from that bid; you
will continue to protect and invest. I do not believe that is
an unfair intervention in the market, and perhaps it would make
an acquiring company think carefully about the sort of offers
and pricing it is prepared to put in front of owners.
Q6 Mr Hoyle: I am in favour of that
if it protects jobs and investment. What happens if the company
then says that the liabilities are so great that it cannot make
a profit and wants to close it down? What do you do? Presumably,
that is the end of the story. For all the best written words in
the world, it is meaningless.
Professor Bones: It could be.
I suspect that you would have to impose some kind of time constraint
or limit and say that over a certain period you would expect x
or y. Inevitably, all regulation has difficulty. If we
are saying that in the national interest we want to invest in
the future of the schools base of this country, for which government
and opposition parties argue strongly, then in terms of public
policy to have platforms to protect that investment is a worthwhile
ambition.
Q7 Lembit Öpik: Turning to research
and development, you have already touched on the fact that Kraft's
formal documentation regards that as a potential area for cost
reduction. You also highlight concerns about the damage this could
do to the national interest. You appear to argue strongly that
certain requirements should be put in place for takeovers of companies
listed on the London Stock Exchange where strategic interests
are to be taken into consideration. How could that be done in
practice without destroying the freedom of the market?
Professor Bones: You can probably
think of doing three things. The first is to make sure that in
any acquisition or bid there is far greater specificity of the
intentions of potential acquirer regarding strategic assets of
national importance. What is left unsaid in these documents is
always far more interesting than what is said, and a lot is left
unsaid. For a start, they should tell us more. Second, one could
look at what commitments the acquirer would be prepared to make
in terms of identified strategic assets. Third, maybe one could
impose some sort of time requirement. One could say that from
the UK's perspective this is so important that they would be expected
to maintain it under the current plans assuming performance continues
at the same level, to go back to Mr Hoyle's point. I understand
that if a business starts to fail you have to do something about
it. That is not what I am arguing. What is intriguing about this
acquisition is that it is about acquiring a profitable business,
so it is not a fire sale. It is performing well, so why would
an acquirer want it?
Q8 Lembit Öpik: There is the
specific example and the strategic macro point. What you say sounds
good if you have great negotiators but government is not very
good at doing that, which is why we end up wasting a lot of money
quite frequently. How can you have a reliable mechanism to achieve
that? Sooner or later even the best strategy has to be translated
into action?
Professor Bones: Ultimately, you
have to leave it to the market to decide. It is very difficult
for any bureaucracy to intervene in the transaction. It really
must be of monumental importance to the state. What you do is
change the way bids are made and the requirement for detailed
information and put far more of your intention into the decision
process. I think that allows a far greater degree of transparency
in decision-making by share owners than currently exists. It is
very difficult to make a decision at the minute apart from just
price, but there are many other levers for making those decisions.
Q9 Lembit Öpik: First, would
that not make it less attractive to be in the London Stock Exchange?
Second, would it not also reduce the value of companies because
of the extra restrictions compared with what might be happening
in Hong Kong or Singapore?
Professor Bones: I am no expert
on European M&A legislation. If it were possible to apply
this logic to assets owned within the United Kingdom then clearly
you would not make it a listing issue; it would be a matter of
deciding whether or not to operate here. I suspect that as long
as you are non-discriminatory you might well be able to argue
a case for it.
Q10 Roger Berry: Obviously, other
countries face similar problems from time to time. What is the
experience of other countries in dealing with this? Is there good
practice elsewhere that you would recommend? What lessons can
we learn from looking at what others have done?
Professor Bones: I am not sure
there are great examples of success. If one looks at the United
States companies can acquire for themselves huge amounts of protection
from poison pill strategies through to protective administration.
The laws of acquisition in many individual states are somewhat
more stringent than they are in the United Kingdom. If you believe
that inward investment is as important as outward investment you
have to live with having one of the most open markets in the world,
which we have. I do not argue for our market to be restricted
somehow, but I think at the minute there are market failures in
this country which mean that people can exploit a merger and acquisition
for their own interests more so than in other places. I think
it is about improving the transparency of the process in this
country. I have not done any empirical research, but on a superficial
level there is no reason to say it is better in France or Germany.
Q11 Roger Berry: Is greater transparency
enough?
Professor Bones: It is transparency
in the decision-making process. I deal with it in the last chunk
of my written evidence. I believe that what gets in the way is
the fact that the owners of the capital employed in any enterprise
are not the people who make the decision as to whether or not
it stays in their ownership. Since deregulation and Big Bang we
have created a series of intermediating stakeholders. I believe
that is where the issue of transparency lies.
Q12 Lembit Öpik: Whilst it is
a laudable ambition it is optimistic to expect a government or
state bureaucracy to apply what you have said. The Secretary of
State can intervene even now in public interest cases that are
specifically defined as national security, media plurality and
the interests of maintaining the stability of the UK's financial
system. To test the specific example, is there any aspect of the
Cadbury takeover which falls under any part of that definition?
Professor Bones: It depends on
how far you stretch national security and national interest. I
believe that to maintain potentially for security a world-class
food science institution within the United Kingdom is rather important
to the long-term interests of the country. Therefore, if the Secretary
of State chose to do so the Government might be able to argue
for some degree or protection or ring-fencing of it from any synergy
or cost-costing exercise done by the potential acquirer. I do
not believe there is a reason for intervening to stop the deal
going through; that is not really where I am. I am much more concerned
about the consequences of changes of ownership to strategic assets
which are still important but less obviously so as opposed to
defence, if you like.
Q13 Lembit Öpik: You do not
believe that we need to amend the definition to include the Cadbury
example in a more specific way?
Professor Bones: I think there
is an argument to amend that definition when it comes to strategic
skills identified for the long-term economic and financial wellbeing
of the country. Food and agricultural science is one of the things
that could come within that.
Q14 Lembit Öpik: To do what
you describe means effectively introducing a small element of
command economy into the free market. One can talk about it in
a theoretical, hopeful sense but there must be some kind of mandate
from the state to impose this in an explicit way which would alter
what would otherwise happen. Do you believe that is feasible?
Professor Bones: I certainly would
not argue it as a general principle, but there are times when
the State needs to set parameters and imperatives. We face three
major crises in this country over the next 10 to 15 years one
of which is food production and security and improving agricultural
performance in the context of climate. Losing a world-class research
centre from these shores in that area as a result of a commercial
transaction strikes me as somewhat unfortunate.
Q15 Lembit Öpik: It is either
a principle, ie it is strategic, or it is not; if not, it is tactical.
How can you do this in a tactical way without introducing this
into the market in a random fashion?
Professor Bones: One must take
a strategic view of 10 to 15 years ahead and what is really critical
for the UK's security. I believe there are not very many of those
things above defence but food security strikes me as one that
is pretty essential.
Q16 Chairman: I looked at some press
cuttings back in 2006 when we considered the takeover by various
foreign companies of P&O, ports, Thames Water, BAA, BOC, Corus,
the London Stock Exchange, Liverpool and West Ham Football Clubs
and Scottish Power. For various reasons a lot of those were strategic.
One could argue that the energy generation industry is even more
strategic than food. What has changed? Have we already gone too
far or are there still sufficient industries under British control
that it is worth being concerned about them?
Professor Bones: I do not think
it is an issue of control. If at the end of the day the management
of enterprise A believes that having access to foreign-owned capital
is a way to develop, say, better energy supply in the United Kingdom
I do not believe there is a problem in principle at all. The issue
is: where these assets are strategically important in the United
Kingdom can or should Government take a view about key decisions
associated with those assets and apply conditions on ownership
or some kind of review of ownership whenever it thinks these are
important? We do this in energy through the regulatory authority.
The Government regulates a lot of foreign capital through Ofgem
so we have a mechanism in place, and the same goes for water.
In manufacturing, services and so on very often we do not have
regulators and we do not need them, but if with an unregulated
industry there are strategic assets can or should the Government
apply some conditions about how those assets are taken forward
by the new owners? It is not about "You can't own it";
that is not the appropriate response.
Q17 Mr Clapham: To turn to business
practices, you make the point that Cadbury is a very successful
business. You also highlight the ethical stance and responsibility
in business that Cadbury brings to the market. How does that contrast
with Kraft, for example? If we look at how they operate in the
market what are the differences between Kraft and Cadbury? On
the ethical side, one sees Cadbury's Cocoa Partnership in Ghana
which was launched in 2008. Is there anything of that nature in
the way that Kraft operates?
Professor Bones: In fairness to
Kraft, one looks at the Rainforest Alliance which is its coffee
equivalent. Its cocoa-based business is smaller in comparison
whereas coffee is one of its major products. Looking at Kraft's
website, its decision to support the Rainforest Alliance is an
example of being community-minded and working as a responsible
organisation. It is a market-driven mechanism to try to build
sustainable supplies, a sustainable supply chain and to invest
in sustainable communities. That is very creditable and is very
similar to the Cocoa Partnership that Cadbury has initiated. The
difference between the two models that strikes me is that Cadbury
has a social perspective so its adoption of Fair Trade for Dairy
Milk has increased those product sales as a whole by 25% in this
country. It has taken Fair Trade from being relatively on the
margin to right at the centre; it has added a huge amount of Fair
Trade turnover in any category. Fair Trade guarantees a minimum
price; the Rainforest Alliance does not but tries to encourage
sustainable markets. That is the difference. Both are very creditable
approaches. If you look at Cadbury you see it going one step further
in terms of its belief about responsibility but some would argue
that it is not necessarily a huge step further. Kraft does some
creditable things.
Q18 Mr Clapham: That social perspective
is enormously important. When we look at the Kraft takeover of
Terry's and what happened following that it appears that Kraft
gave certain undertakings but they were not adhered to. Is it
fair to say that the way in which Kraft is likely to operate in
the market is that it does not have the same kind of responsibility
with which Cadbury operates; it does not appear to have the same
ethical underpinning?
Professor Bones: I would put it
this way: the drivers for a business listed on a US stock exchange
with quarterly reporting and a constant demand for revenue and
margin improvement are much more short-term than the drivers for
a business listed on a European stock exchange. One can see in
the management and business practices of the different listings
how much tolerance and acceptance there is of the longer-term
and perhaps a more responsible viewpoint. If one operates under
tighter constraints one finds it more difficult to justify a drift
away from sustainability or investment in communities than perhaps
other organisations. I do not think it would be fair to say it
is a particular mindset in Kraft or Cadbury. One is a child of
the system in which it operates and Kraft operates in a very different
system and in its own way.
Q19 Mr Clapham: But it brings the
child of the system into the UK market. There lies the real problem
because if it is to be short-term it means that possibly it will
move on very quickly. We may well see the cost base move and consequently
we shall lose that kind of research and development at the University
of Reading.
Professor Bones: In this session
I am just as worried for the shareholders of Kraft as I am for
the shareholders of Cadbury. One just has to look at Warren Buffett's
intervention a couple of week's ago to understand that Kraft itself
has growth problems. Its share owners are not convinced that feeding
the executive ego, if you like, for a big acquisition is the right
thing to do. The worrying thing is that these sorts of things
quickly become about personalities rather than whether or not
it is the right thing to do. One need look only at RBS's acquisition
of ABN Amro and the battle of the titans as between various chief
executives to realise how these things take root. I am with Buffett.
I do not believe that it is in Kraft's interests to acquire this
particular business for a price that is much more than it bid,
and clearly if you look at the results this morning it is not
in the interests of Cadbury's shareholders to accept the price
that is currently on the table. At that stage one might say that
it is time to walk away. The problem is the fuelling of all of
this by advisers, investment banks and so on. The Times
made a calculation based on figures sourced from Reuters for the
last year that fees of about £600 million could be spent
in this takeover battle on advisers, lawyers, investment banks
and other people regardless of whether or not this happens. One
of my big worries is that the Cadbury brand will end up taking
on the costs of its own acquisition and defence which could run
even closer to £1 billion plus the interest on leverage funds
used to acquire it—even if Kraft put in more cash which
it does not have today. What will that do to a profitable business
and therefore to the cost base? It is not about Kraft's way of
managing it; I think it is about the consequences of what it is
doing which potentially puts its own business as well as Cadbury's
at risk.
Q20 Mr Clapham: Cadbury is a successful
company and the shareholders of both companies would perhaps be
better looked after were Cadbury able to continue as a prosperous
company in the UK.
Professor Bones: I think it was
KPMG who did a piece of work about seven or eight years ago which
showed that 80% of hostile takeovers failed to deliver the case
that was put to shareholders to justify the price paid. The 20%
that delivered the case, succeeded because they were underpinned
by factors such as common cultures, a common understanding and
so on. Until I left Cadbury's its track record was that 80% of
its acquisitions met or bettered the business case. That is because
Cadbury has never conducted a hostile acquisition. Its latest
acquisition was Green & Black's which came to Cadbury and
asked to be taken over. It asked to be taken over because Cadbury
had values; it had a belief in brand, it understood what Green
& Black's stood for in terms of responsibility and ethical
sourcing, but could give the manufacturing, procurement and distribution
scale—Green & Black's is now taking on America very
strongly—in order to build the Green & Black's brands,
so it would invest in it long-term. As to Kraft and Cadbury, having
worked for one and looked carefully at the other their cultures
are very different; their way of operating is so different; their
business conscience and approach are different. Particularly with
the leverage involved this cannot be anything other than a potential
disaster as opposed to a potential success whatever price is paid
for it. This is not an issue of government policy, but it does
say something about how we educate business managers. They really
do not understand that to waste share-owner money on a potential
ego trip, (for that is what they have done in this bid) is a serious
issue.
Q21 Ian Stewart: Successive governments
have bought into the concept of a shareholder democracy. You have
argued that the reforms have given the decision-making power to
a small number of fund-holders which is not necessarily in the
interests of many shareholders. We live in a market economy. Any
economic system has strengths and weaknesses. You have raised
concerns about the different roles of the shareholders and middlemen
in relation to takeover decisions. What can be changed to ensure
that the interests of the individual investor are protected? I
believe that earlier you were keen to say something about that.
This is now your opportunity.
Professor Bones: Perhaps I may
go back to Adam Smith because there is an important principle
here to do with investors. When Smith wrote his original text
he talked about the invisible hand in the market. Quite often
that has been hijacked by neoclassical or monetarist economists
who say that the logic of the invisible hand is that one therefore
leaves the market alone. The invisible hand was the guiding social
and political principle behind investment decisions; in other
words, despite the return that could have been offered to Scottish
bankers more often than not they chose to invest in Scottish or
local opportunities even though the returns perhaps were financially
not as great. One could say that if only RBS had done that it
would have been fine. What is really interesting about it is that
what Smith noted, and is still true today, is that the real investor,
the owner of the capital, does not make an entirely financial
decision. If you ask ordinary share owners about transaction A
or transaction B quite often regardless of price there will be
other reasons for keeping the shares or some of them. Smith picked
this up. Obviously, he could not measure it and he called it "the
invisible hand". I believe that as a result of the rise of
intermediating forces the invisible hand has become the invisible
incentive. For stakeholders the invisible incentive is the way
they run the funds, the cash they need, the profitability target
and potentially the trigger of bonus payments which would lead
to decision A as opposed to decision B; in other words, they are
not acting for my long-term capital interests but perhaps for
their long-term and sometimes short-term gain. It is a completely
different interest from that of the share owner. In a market economy—again,
this is not an attack on the market—this strikes one as
a market failure and therefore the Government could consider putting
some constraints on the funds to make sure they consult the owners
of the capital before they act on their behalf. For most fund
managers it is not their capital; it is not their skin in the
game but my skin and yours. For pension funds it is quite easy
to do it because you can say that if a pension fund hold block
A in company B then the trustee should be consulted on how the
shares or number of votes it holds should be cast. There are trustee
mechanisms in place today for pension funds that can easily be
engaged to do that. The other thing Government must do is consider
democratising funds and requiring the fund management company
to consult the owners of the capital when a decision has a pecuniary
benefit to the fund management company itself, which accounts
for quite a lot of decisions. I believe there is a role for Government
in the market in terms of structuring funds, not to intervene
in the actions of the market but to say to it that it will act
properly so that the real owners of the capital have their say.
You can see, therefore, fund managers casting three votes: a percentage
for yes, a percentage for no and a percentage for abstaining,
as they are entitled to do today. I do not believe that you would
not have to change the law for them to do that.
Q22 Ian Stewart: Do you argue that
we are not concerned with just the qualitative aspect of the decision-making
and what we need is for Government to look at regulation?
Professor Bones: I am not a great
believer in over-regulating anything, but this is an area where
there is a surprising lack of regulation. I am not surprised because
these funds and their impact have mushroomed over the past 30
to 40 years. In the old days of a stock-holding company if we
were shareholders of company A we would all turn up in the room
and cast a vote. For most large corporations the annual general
meetings are a bit of a joke. The annual general meeting vote
may go against a remuneration report but millions of shares cast
by 10 investment fund managers in favour of it gets it through.
I am saying that is not in the best interests of capitalism or
the market economy in this country.
Q23 Ian Stewart: In your view what
department should lead on that? Would it be the Department for
Business, Innovation and Skills or HM Treasury?
Professor Bones: It is a business
ownership issue. If you have a department that looks after the
interests of good governance in business it should pay attention
to how the real owners of the capital employed by that business
are engaged in decisions about that business.
Q24 Ian Stewart: Have you had any
discussions with either Department about these issues or shareholder
rights?
Professor Bones: I have submitted
my opinion on the matters of principle to officials in the Department
for Business, Innovation and Skills and not surprisingly it is
very similar to the written evidence you have in front of you.
Q25 Ian Stewart: You have given us
your views about potential regulation and to which department
you think that should relate. If the free market is to be maintained
as you wish it to be can any reasonable protections be given to
listed companies on the London Stock Exchange so that they remain
listed in the UK rather than move to other stock exchanges? That
appeared to be your concern earlier.
Professor Bones: In some ways
it is a consequence of the globalisation of everything. Ultimately,
business will globalise as well. I do not believe there is anything
other than very unsubtle and ultimately unhelpful regulation that
can be put in place to protect LSE-listed companies over and above
other organisations, hence my earlier comment on the research
and development side. There are things that Government can do
which are perhaps more sophisticated and challenging.
Q26 Ian Stewart: Do you argue that
rather than heavy-handed regulation for the LSE and so on labour
market development issues like training and skills can play an
important role in this area?
Professor Bones: Yes. I am surprised
by the public policy gap in terms of the pronouncements of legislators
and others who say that the supply side in the economy is as important
as the demand side and yet do not think of the consequences of
economic transition which will happen inevitably in relation to
things like strategic skills and opportunities for training and
development. We are at risk of potentially de-skilling Britain.
Whether you put 50% or 80% through university will not make a
hoot of difference. What is important is that there is skilled,
challenging and well remunerated employment available to people
with skills and good education. We are banging people through
university at the minute. As someone who sits in one of Europe's
top business schools it is really difficult to see where a lot
of our graduates will go over the next few years if fewer and
fewer opportunities exist for really skilled people. Thinking
about the demand side and what one does in the market to protect
it is as important as thinking about the supply side.
Q27 Mr Hoyle: You state in your memorandum
that, "The ultimate irony for any government would be the
sight of the corporate banking team at RBS or any other government-owned
institution being paid multi-million-pound bonuses for funding
the acquisition of a UK company by a US conglomerate at a price
that failed to reflect real market value with an outcome that
damaged the long-term interests of the UK economy." Those
are very strong words, and I totally agree with them. To push
it along a bit, quite rightly you criticise the role of RBS. Effectively,
it is a state-owned bank—we can all agree on that—and
it is providing funds for a takeover. Do you think the Government
should intervene as the virtual owner of RBS to stop it facilitating
Kraft's takeover in the bid for Cadbury?
Professor Bones: As to Kraft's
bid for Cadbury, the involvement of a taxpayer-owned bank in supporting
a less than successful global conglomerate to buy a successful
British company is surprising. I am particularly surprised that
the Government as the main representative of the taxpayer shareholder
in RBS has not said to RBS that now it owns the bank—it
did not want to do so and would probably like to get rid of it
at some point soon—it will operate not just for short-term
profitability but for the long-term interests of the United Kingdom.
I do not believe there is any shame or problem with the major
shareholder saying that to the bank and then getting the bank
to respond with an investment policy that meets its profitability
targets but at the same time supports British businesses. I just
do not understand why we have not done it.
Q28 Mr Hoyle: The suggestion is that
we bring morality into banking?
Professor Bones: It is not morality.
Perhaps you bring in exactly what Smith said: you bring back to
banking the invisible hand.
Q29 Mr Hoyle: I do not disagree with
you. There is a role there and RBS ought to think about what it
is doing. At some point there is more to life than profit. We
are talking of the future of UK jobs, R&D and so on. We can
go through all of that. Would not the issue be that it would only
go to another bank, so is it not the case that a British-based
bank which gives a profit to the taxpayer is not allowed to do
it but we are quite happy for a foreign bank to increase profits
for its shareholders?
Professor Bones: The answer is:
yes, as has always been the case. I just think it is remarkable
that where we have the opportunity to leverage the banking sector
we do not take it to build the economy. Whilst leaving it for
others is fine, I think that to make it that much more difficult
to do these sorts of things is a perfectly legitimate government
ambition where it tries to protect what it sees as jobs and productivity
in the UK.
Q30 Mr Hoyle: Do you believe that
in part this takeover has been created by Cadbury itself because
the demerger of Schweppes has made it more attractive? It has
put profit in the bank and invited companies round the world to
take it over? Is it Cadbury's own failure that has caused it?
Professor Bones: Cadbury has been
under pressure from its major share owners for some time to dispose
of its soft drinks business which, if you exclude the United States,
owned only 3% of the world market as against Coke and Pepsi that
own 20% to 30% each. But it was ultimately Cadbury Schweppes'
poison pill equivalent because it was a very difficult thing to
have and it put a number of big predators at bay. Clearly, by
doing what its intermediating stakeholders wanted to do, which
was to get rid of the drinks industry, it created a lot of value
for those people in the short-term, but that value is now not
reflected in continuing share price growth. It has since focused
on confectionery. It is a very good commercial company. If you
want my personal opinion, a share owner in Cadbury would be much
better served by a link with Hershey than with Kraft. Hershey
owns in perpetuity all of Cadbury's production licences from its
products in the United States in the early 1980s when it had to
get out in a hurry or go bust. Frankly, if one is looking at the
interests of Cadbury one will say that to get back control of
its US brands is much more attractive to management and a much
better proposition for Cadbury's share owners than to become part
of a processed food conglomerate.
Q31 Mr Hoyle: Basically, I believe
that Cadbury is the good guy and Kraft is the bad guy, so we are
on the same side. You go on to say that the US conglomerate is
not a very successful one and Kraft is perhaps a failing company.
If that is so do you think RBS ought to fund Cadbury to do a reverse
takeover of Kraft and sell off the failing company? Would that
make sense?
Professor Bones: I do not think
Cadbury is an expert in processed foods and it probably should
avoid it at all costs.
Q32 Mr Hoyle: That is why you would
sell it off.
Professor Bones: I do not believe
Kraft is a failing company; it is just not a very strongly performing
company. It is a company that has all the trappings of the US
conglomerate up to and including the corporate jet.
Q33 Mr Hoyle: There is a big saving
there, is there not?
Professor Bones: If I were Irene
Rosenfeld I would look to my own margins and costs before grabbing
something else in order to improve my growth figures. If I were
a Kraft shareholder I would insist on that. As to funding, the
challenge for RBS is that according to the CBI there are a lot
of British businesses—here I agree with the director general—looking
and applying for but failing to get funds for jobs, investment,
expansion and capital investment. Frankly, if I was an RBS shareholder,
which is why I pick on RBS as a taxpayer-owned bank, I would be
looking to use those assets to build Britain's recovery from recession
which is pretty slow at the minute.
Q34 Roger Berry: Referring to the
final paragraph of your memorandum just quoted by my colleague,
I do not find this situation strange at all. You have said repeatedly
that you believe by and large the market should be allowed to
operate, but there are two quite distinct issues here, are there
not? In a sense you are rolling them up into a rather nice final
paragraph. One issue is takeover policy; the other is the role
of banks. Do you agree that getting the takeover policy right
is the issue and in a sense whether or not RBS is involved in
this is a sideshow? If there is an opportunity for RBS to make
money you would advocate that banks should be allowed to do so.
In the final paragraph are you not moving the issue away from
the key point which is takeover policy? I will take swipes against
RBS like the best of them; they deserve quite a lot, but that
is not the issue here. The issue is takeover policy, is it not?
Professor Bones: I think it is
an interesting side issue though a related one. The core issue,
to which the Committee may wish to return in some detail, is that
it appears to me the distance that has been created between the
owners of capital and the stewards of it, ie the managers of an
enterprise, and therefore the lack of communication and mutual
interest is a fundamental shift in the capitalist structure over
the past 50 to 60 years which is starting to put at risk whether
the joint stock company is a sensible solution for capital ownership.
Ultimately, it is a bit of a farce because the real owners of
the capital do not get to cast the votes. For most big stock-holding
companies there is a little oligarchy at the top that casts a
lot of votes and has a lot of power. That strikes me as a much
more fundamental issue for policy than some of the specifics around
Cadbury/Kraft. If you can get the rights of ownership right so
owners can say, "This is my capital and I want a say",
you create the grounds for a successful share-owning and property-owning
democracy with real accountability. At the moment in my view the
stewards are getting off lightly and a lot of middle people are
making a lot of money.
Q35 Roger Berry: But do not those
who own RBS, whether it is the state or individuals, benefit from
that or any other bank making money out of takeovers?
Professor Bones: Indeed; the Exchequer
benefits from RBS making money out of takeovers, but in the long-term
does the British economy benefit from some of these actions?
Q36 Lembit Öpik: Given Roger
Berry's question and the real world, the Government has said that
basically it is looking after RBS until it can stand on its own
two feet again. In order to do what you describe the Government
would have to do something extra: to start using its stock in
RBS to guide social or economic policy. Leaving aside the political
discussion, is it practical for the Government to do that without
directly contradicting its own objectives, ie rehabilitating RBS
and giving it back to the private sector?
Professor Bones: The success of
the Co-operative Bank and the co-operative movement generally
over the past few years is probably an example of why it might
be in the long-term interests of private sector banking to think
more about social and political issues than just short-term profit.
Chairman: That is a subject for another
time but it is a fascinating one. Thank you very much for that
very helpful discussion.
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