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The Government would have us believe that this financial crisis is global or supranational and that they have no responsibility at all for its creation or for the fact that the cupboard is bare at the onset of the crisis. On the other hand, the Government are prematurely trying to take the credit for solving the crisis by taking decisive action earlier than others and by creating the model for rescuing financial institutions which has now been followed by others around the world.
It is true that the financial crisis is global. However, London is the most important financial centre in the world and financial services account for a significantly greater proportion of GDP than is the case in all the other leading economies. Financial markets are now largely global. The Government, by their own profligacy during the boom years, set an example that was unfortunately followed by the banks. They inherited a healthy and improving economy in 1997 but have borrowed too much and spent it all during the good years.
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The gracious Speech acknowledges that the strength of the financial sector is vital to the future vibrancy of the economy and says that the Banking Bill will ensure fairer and more secure protection for bank depositors and improve the resilience of the financial sector. It is true that the Government did move, perhaps belatedly, but decisively, to recapitalise the banks. Will the Minister explain why the Government needed to be quite so vindictive and punitive towards the banks in the detail of the measures that they have adopted, which are harsher and more demanding than the equivalent measures adopted by other countries in various ways?
The Government have said that they will not act directly as a hands-on shareholder. In that case, why did they insist on taking such a large proportion of their shareholding as ordinary shares? Indeed, why did they not provide most, or even the whole, of the recapitalisation package in the form of preference shares, thus avoiding dilution of ordinary shareholders?
By no means have the Japanese Government excelled in the management of their economy over the years. I declare an interest, in that I am employed by Mizuho International plc, the London-based investment banking unit of the Mizuho Financial Group. Mizuho has suffered some sub-prime-related losses in the current crisis, although these are relatively modest compared with the losses sustained by many leading American and European banks. The three leading Japanese banking groups are in relatively much better shape than many of their American and European competitors. One thing that the Japanese authorities did get right was the scheme used to recapitalise the Japanese banks after the collapse of the property bubble in the 1990s. It was done wholly by the issuance of preference shares; there was no talk of nationalisation. There were strings attached but, crucially, there was no restriction on the payment of dividends. The preference shares have now all been paid back.
This crisis is of course different in both scale and reach, but there are still two good reasons why the Government should revisit their decision to restrict dividends on our banks’ ordinary shares while the preference shares are outstanding. First, the purpose of issuing the preference shares and the equity injection was to recapitalise the banking system. To ban ordinary dividends until the preference shares are repaid distorts incentives towards shrinking the capital base of the industry by prematurely retiring the preference shares simply to restart the payment of ordinary dividends. Secondly, if the Government permitted dividends on the ordinary equity, there would be a significantly greater chance of clawback taking place, reducing the cost and risk to the taxpayer of recapitalising the banks. It would also underpin the value and marketability of any stake of ordinary shares that the Government held.
To turn back to the question of preference shares, why have the Government saddled the banks with a cripplingly high coupon level of 12 per cent, just at the time when the base rate has been cut to 2 per cent? As Dominic Lawson asked in his excellent article in yesterday’s Sunday Times, referring to the Prime Minister,
- “if 12 per cent is the rate he believes it is necessary to charge the banks for long-term money, why should the banks be expected to charge only one-sixth of that to other British businesses?”.
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The Prime Minister boasts that other countries, such as the United States and Germany, have followed his lead in recapitalising their banks. But other countries have been much more reasonable and less punitive towards the banks. The US Treasury has imposed a coupon of 5 per cent on its new preference shares, while in Germany the coupon is between 5.5 per cent and 8.5 per cent.
I would like to say a quick word about regulation. I do not agree with the noble Lord, Lord Turner, that the FSA needs more people. The FSA seems to me to already have far too many people and to spend a great proportion of its time on internal meetings—it is very inward looking—and on having conferences with other regulators. It is essential to preserve the competitiveness of the City of London in the future and, to that end, we should not rush to introduce much more strict regulation. We need better regulation, not more of it.
Other noble Lords have mentioned the pensions problems. I look forward to hearing what the Minister has to say about the ever growing, unfunded public sector pension liability, which stands, I think, at some £1.3 trillion, at a time when our private sector pension schemes are suffering even more from the collapse of the markets and their deficits will be much bigger than they were a year ago.
5.30 pm
Lord Haskel: My Lords, the starting place for today’s debate must be the financial and industrial crisis about which many noble Lords have spoken. All that I can say is thank goodness we have a Government who quickly came to grips with the crisis and acted, instead of just resorting to what I can only describe as uncaring sloganeering from the sidelines. However, while acting, the Government must have an eye to the future. This is what the gracious Speech tried to do, because a necessary part of leadership in a crisis is to present a picture of the future—a picture of what things will look like after the crisis. The right reverend Prelate said that it was not going to be the same, and he is right.
One thing that we will have to tell people is that although skills training must and will continue, as the Minister explained, the plum jobs will be much harder to come by. He spoke of alternatives. Many more people may well have to start things for themselves. The Government are right to do more to finance start-ups and early-stage businesses. Social and community development finance is helping, too. The noble Lord, Lord Bilimoria, who I am sorry is not in his place, paints too dark a picture, because tax rates are not the main concern of people who are starting up or running a small business. There is nothing wrong in doing something which you find interesting and absorbing but is low paid, especially when security is less important because you are young or have no dependants. You may find this in the expanding social enterprise sector, in crossover with charities or in the world of the internet, which requires little or no start-up capital yet is producing a growing number of businesses. Two-thirds of home workers are self-employed. Home working is bound to grow, partly because of the low overheads and partly because of the reduced carbon footprint.
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We all agree that much of this new kind of work will come from the Climate Change Act—and that is right—but that needs to be spelt out a bit more. Yes, there are high-tech solutions like nuclear power stations and carbon capture, but at the same time there is a lot of low-tech work to be done, such as insulating homes and offices, sorting waste so that it can be used and recycled, or so that it can become a source of energy, not just rubbish. As the power or energy components of products become critical and more expensive, the paradigm of “reduce, reuse and recycle” is catching on and is leading to new types of manufacturing. Caterpillar equipment is being made in Gloucestershire by a combination of reusing parts from old machines together with new components. Disassembly and reassembly will lead to different economics in manufacturing and a new kind of manufacturing job here.
It was the leader of the Opposition who spoke about balance when he addressed the CBI last month. He said:
“We must never again let our economy become so dependent on such a small number of industries and markets like finance and housing”.
The Prime Minister and the Secretary of State spoke about developing strategies to help compensate for the shrinkage in financial services. I agree.
Much of this rebalancing will come from the Government’s encouragement of science and technology—encouragement that they have given ever since they came to power in 1997. As my noble friend Lord Rooker reminded us, a lot of thought, effort and research has gone into what new challenges society will face and how technology can deal with them. Our Foresight programmes have imagined the future. Our research councils and universities have researched this. The Technology Strategy Board is driving business to put this into practice in many areas—in energy, buildings, transport, medicine and healthcare, the creative industries and high-value services. I hope that by the time this crisis is over we will have finally broken down the attitude that has created an artificial barrier between manufacturing and services, which has done much to hinder our economy. Millions of pounds are being spent on this every day, not to retain the past, but to create the future—a balanced future. As well as telling us how much is being spent on rescuing the banks, I hope that the Government, with equal frankness, will tell us how much is being spent on building our future.
One may say, “What about businesses? Will they do their part?”. I have every confidence that they will, because, as my noble friend Lord Bhattacharyya reminded us, research shows that companies that stick to their R&D as recession bites and sales drop enhance their position against their competitors, because when the upturn comes they have better products and services.
I hope that my noble friend can confirm that this work will continue. The 44 science training centres announced last week are a good sign that it will. Particularly to my noble friend Lord Rooker, I should declare an interest as president of perhaps the largest knowledge transfer network, Materials UK, which brings together many of the things that I have mentioned. As he indicated, we are all interconnected now. After this crisis, business management will become flatter
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I suggest one simple way in which this relationship can be improved: change the basis of consultation. In recent years, a certain cynicism has entered into this relationship on both sides. Business has used consultation for lobbying and the Government have viewed this as corporate self-interest. True consultation is important, because policy emerges at great speed, and sensible policy that works is everyone’s goal. However, consultation largely involves organisations which are set up to carry it out and lobby for their interests at the same time. This is what gives rise to the cynicism. Perhaps the current dialogue points to another way, because individuals must contribute to consultation. Their professionalism, expertise and passion for their industry need to be heard. Cannot this consultation take place in other ways, such as making people’s views available on videos to us all on a special website? This is what our children do, and maybe we can learn from them. I know that this will mean more work for the Government, but we will all have to work harder to make the new relationships work and to make markets work better.
To secure this future, we must have a picture of what our economy and society will look like. Interdependence will be a large part of it, much larger than now, and we must prepare for it.
5.39 pm
Lord Smith of Clifton: My Lords, I want to raise two aspects of the operations of UK business, neither of which is adequately dealt with in the gracious Speech. The first is the critical need to improve the standards of corporate governance, while the second concerns the chronic gender imbalance as regards both the numbers and remuneration of women directors and senior managers.
Corporate governance was the subject of three separate and successive inquiries in the 1990s. The Cadbury, Greenbury and Hampel reports examined different aspects and made recommendations accordingly. With hindsight, in view of the magnitude of the crisis that has since engulfed trade and commerce both in the UK and worldwide, these inquiries were inadequate to fend off what was to come. The Enron debacle, a portent as to the future casino character of capitalism, provided a glaring warning that was not heeded. The imminent Wigley report on promoting the City of London as an international finance centre, while doubtless useful in a limited way, will not deal with the fundamentals of the problem. A much more substantial analysis is now needed and the Government should appoint a high-powered inquiry to undertake it as a matter of urgency. Codes of conduct now must have a statutory basis as voluntary self-regulation has proved useless. Furthermore, radical reforms to company law may also be necessary.
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A preliminary start has been made by the Association of Chartered Certified Accountants. Its publication, Corporate Governance and the Credit Crunch, published last month, is a thoughtful and timely contribution as to the way forward. The ACCA identifies a failure in corporate governance as the underlying factor that led to the credit crunch. It makes nine proposals to help to remedy the situation. I shall not detail them all now but will highlight the main ones.
have not asked the right questions, and,
- “have allowed inadequate risk management and sanctioned remuneration incentives that influenced behaviour without proper consideration of risk”.
“Risk management tools have not always been fit for purpose”.
This has been exacerbated by the overcomplexity of products in the financial sector and poor training of both executive and non-executive directors that led to a lack of understanding of the associated risks. Crucially, boards, and particularly non-executive directors need assurance independent of management, which requires a much greater enhancement of the role of internal audit, including, in the words of Professor Andrew Chambers, the creation of a cadre of “super auditors” who can relate on even terms with board members.
Then there is the question of the effectiveness of the regulators. Clearly, the Treasury, the Bank of England and the FSA were an inadequate triumvirate of agencies. The proposed banking Bill is intended to improve regulatory oversight of the banks and this House must ensure that it does so.
Whatever the shortcomings of regulation, the fact remains that the boards of many companies, especially the banks, were guilty of gross dereliction of duty. In our debate on the British economy on 3 November, perhaps too much stress was put on regulatory failure and far too little on boardroom behaviour: however incompetent the policing may have been, that does not exonerate the wrongdoers, who should be punished.
In yesterday’s Sunday Telegraph—not a left-wing newspaper—Liam Halligan wrote:
“It’s not good enough to ‘avoid the blame game’ and ‘look to the future’. For, be in no doubt, this crisis has its roots in fraud—from the mortgage brokers who sold loans they knew would fail to the investment ‘professionals’ who rolled-up the debts into securities and the ratings agencies that stamped them ‘triple-A’.
We need tough questions and full investigations. Those most guilty must go to jail. Unless that happens, and is seen to happen, expect a repeat crisis in a few years’ time”.
That does not exaggerate the predicament that has to be faced.
I now turn to my second question—namely, the under-representation of women on the boards of major companies and their relative underpayment. The situation is getting worse in many respects. For example, the Office for National Statistics reported in November that the gender pay gap has widened over the past year. Men in full-time work are paid 17.1 per cent more than their female counterparts, while those engaged in part-time work earn 36.6 per cent more. Moreover, a recent study by the University of Exeter found that
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Of even greater significance, the World Economic Forum revealed that the UK had fallen from 11th to 13th in the global gender equality league—one below Sri Lanka. In terms of overall economic participation, covering earnings and the proportion of senior managers and professionals, Britain has dropped no fewer that 10 places from its 2007-08 score to number 42 in the world rankings.
I have drawn attention before in your Lordships’ House to the splendid example of Norway. In 2003, it passed legislation requiring women to hold 40 per cent of the main board seats in public companies by 2008. This year has seen that goal exceeded, with 44.2 per cent of directors being women. That is a dramatic increase, given that in 2003, when the law came into force, women directors accounted for only 6 per cent of the total. Sweden and Spain now have similar legal requirements in place, and New Zealand and Australia are actively considering adopting such affirmative action. Why is the UK so slow to follow suit?
If the Government continue to do nothing positive in this regard, and the reporting of gender pay discrepancies, as envisaged in the gracious Speech, is little more than a token gesture, one recent study estimates that gender balance in corporate board directorships will not be realised, incredible as it may seem, until 2225. The House of Lords might by then be even further reformed.
The Government insist that it is up to shareholders to initiate progressive reforms, but the present economic crisis has proved how little power they can wield, even if they were inclined to do so. The Government are now the major shareholder in many of the banks. Will they make provision in the forthcoming banking Bill, announced in the gracious Speech, for 40 per cent of the directors on their boards to be women? If not, why not? I should like to be reassured that they intend to introduce a 50 per cent rule.
We know where the pale, stale, male composition of the boards of major public companies have got us—up the creek without a paddle. The creation of greater diversity on corporate boards by the appointment of more women directors correlates with better financial performance. A 2008 study of Fortune 500 companies found that, on average, enterprises with higher percentages of women directors outperformed companies with lower ratios.
It is high time that the Government tackled the related problems of poor corporate governance and the inequality of women in senior management that currently afflict the United Kingdom.
5.47 pm
Baroness Kingsmill: My Lords, I intend to be brief, not least because the noble Lord, Lord Smith of Clifton, has somewhat stolen my thunder by saying exactly what I would have wished to say had I thought of it first—or, at least, had I appeared higher in the list of speakers.
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It is very important that we do not forget that we have had 10 years of unprecedented growth and stability. As we sit here today listening to the doom and gloom of the current recession, it is most important to recognise that we have had very good times thanks to the sound economic policies of this Government. Hospitals and schools have been built, people who might otherwise not have been able to have bought their houses, and our town centres have been regenerated and rejuvenated. Therefore, we should not forget the advances that have been made and the wealth that has been created.
Perhaps I may detain noble Lords for a moment or two with an anecdote. I recently brought a couple to the House for tea. They were young entrepreneurs—I say “young” but it is all relative; they were in their early 40s. During the past 10 years, they had established and developed a very successful waste management business, recycling the waste products of the metal industry in south Wales. They had recently decided to gift 15 per cent of their company to their employees. Because of the wealth they had created due to the favourable economic conditions of the past 10 years, they had also decided to set up a fund to benefit social enterprises—that is, to benefit those who were setting up businesses designed not only to make a profit but to meet a social need. It is interesting that in these difficult times such businesses appear to be flourishing. I recently spoke at an event at which 250 people of high net worth appeared to listen to five or six young people talking about their businesses in the social enterprise sector. Those enterprises ranged from making fashion accessories out of recycled clothes to Jamie Oliver’s trendy restaurant Fifteen. All of them excited great interest from potential investors. It is most important that we see where the potential green shoots are.
There is no doubt that we are in difficult times and that we must look for the best ways of managing and emerging from them. I am pleased that in the gracious Speech the Government set out plans to emphasise protection of employment and to develop training programmes. This is a perfect time to concentrate on the development of our human capital, as that is what will enable us to get out of the difficulties now facing us. We also need to concentrate on having a more diverse economy. There has perhaps been too much concentration on financial services and insurance, and we are suffering from it. Although it is important to focus on excellence, perhaps it would be useful to hedge our bets by focusing on a more diverse economy.
I would not want to sit down without saying something about competition. While I completely support the Government’s moves in the banking sector in most respects, I am most anxious about lifting the competition rules within the sector. I have expressed those views in this House before and I express them again now. Although I understand the pressures of the moment, I am agreeing with Irwin Stelzer’s views in today’s Financial Times when I say that I think the competition regulators should be at the table when the negotiations on future regulation of the financial sector take place.
I commend the Government also on their moves to stimulate innovation. Young innovative entrepreneurs will provide us with the best way out of this downturn. We must remember that the downturn is of global
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5.53 pm
Lord Tugendhat: My Lords, it is just over a month since we last debated economic affairs in this House and I see many familiar faces on the Benches around us. The newcomer is the Secretary of State and I congratulate him on the courtesy that he is showing the House by the amount of time that he is spending on the Bench. It is good to see such a senior Minister in that position.
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