27 March 2015

Is it now time to look beyond the PLC?


The recent debate about ‘better capitalism’ or ‘ethical capitalism ‘ has been superficial and contrary to the long term aims of a mixed economy. Much has been made of the symptoms of some of the problems such as excessive pay, non-disclosure, tax avoidance, price rings, and lack of competition and investment. The response has generally been to increase the scope and costs of regulation rather than encouraging the foundations of capitalism, namely diversity and competition.

There has been very little commentary on some of the underlying causes of such problems and particularly how the dynamics of firms are much affected by their ownership structure. This is not surprising given the media attention from the BBC, FT and the most local newspapers who all seem to think that economic commentary rotates around quoted companies and public capital markets.

Yet though they do not make the news in such media there is a whole world beyond the large quoted PLCs. They range from family companies, partnerships, employee-owned organisations to mutuals, friendly societies to government-owned and now crowd-funded start ups. Many of such organisations are, or should be, of great public interest. Amongst them are some of our greatest exemplars of socially responsible businesses and most are by any means successful and sustainable. They are just the sort of organisations that our leaders say they want more of.

For example in the most recent Institute of Customer Service survey comprising the views of 39,000 consumers, John Lewis (an employee owned company) scores the highest for customer service across all sectors in the UK, Nationwide (our largest mutual building society) ranks 6th, with LV= (our largest friendly society) 7th and by a distance the highest placed insurer. Others in their respective sectors languish down the list so that the next best insurer (not a mutual) is at 47th. Sadly, not one public sector organisation is evaluated but they are unlikely to be in sight.

There are countless other examples where those organisations with different ownership structures score far higher than their PLC counterparts in customer satisfaction, employee engagement, openness and accountability. They take a longer term view of their market position to provide long term value accumulation. They take pride in ‘doing the right thing’ for customers and staff and treat profit as a consequence. These are surely the foundations of ‘better capitalism’.

This observation is not surprising. In the words of many business school professors ‘you tell me what really drives compensation at the top and I will tell you what strategy is really being implemented!’ We know that most businesses are largely driven from the top. If its leaders are only interested and only get compensated through achieving short term profit then this will drive behaviour throughout the organisation. The rampant capitalism that featured in our investment banking industry is just one extreme example. (How we must wish they had remained as partnerships putting their own personal capital at risk.)

Many would argue that we have suffered from the dominance of the PLC model which has always been the focus of legislation and became the default vehicle for so many businesses. It has had many advantages over centuries not least in the ease of raising various forms of capital and of monetising part ownership. However some have laid many of the recent problems of the reduction of consumer trust and confidence in major parts of our economy at the door of this model. Amongst the concerns expressed are:

  • the emphasis that PLCs have on short term risk taking at the expense of long term success
  • the separation between ownership and control has weakened both governance and accountability of management
  • that large transactions are determined by shareholders who may have a very short-term shareholder interest bearing in mind the average tenure of a shareholder amongst FTSE companies in the UK is measured in a few weeks not years.

Some of these weaknesses are most acute in the financial industry. For example, some of the disillusionment in customers are a symptom of the difficulty in reconciling the short term interests of a shareholder group, possibly aligned with managements’ compensation basis, with those of customers who have, say, a pension or annuity which are commitments over decades. The alignment of stakeholder interests between customers and owners is by definition far healthier in a mutual organisation. The guiding principle of mutuals is to generate long-term member value through doing what is right for customers and members. Other ownership structures have their own advantages and disadvantages.

Consumer choice and diversity of supply is very healthy yet alternative businesses remain distinctly disadvantaged and proportionally low in numbers. The Companies Act is geared around the modern practices and governance procedures of the PLC, but there is an absence of consistent and updated legislation to cover firms with different ownership structures. This leads to an uneven playing field for non-PLCs, damages competition and leads to unnecessary costs both for the firms as well as for the regulators, all of which are eventually passed on to consumers.

Government has a role to play in encouraging diversity to support a balanced, competitive economy that is not over-dominated by one particular model. This is not to advocate an anti-PLC approach nor favouritism for customer owned mutuals or other non-PLCs. It is suggested so as to encourage a policy approach from Government and regulators that acknowledges the unique nature of different business models, particularly in financial services but also in the wider economy, and that there is equal and constructive support for each model.

There are some practical steps the next Government can take which would seek to level the playing field for non-PLCs. These are to:

  • Review the existing Companies Act and amend it so as to encompass alternative ownership structures
  • Ensure that future business,enterprise incentives and tax legislation should always encompass the up to date needs of family companies, partnerships, employee owned, mutuals, friendly societies and crowdfunded organisations
  • Include alternative ownership structures within the remit of the Financial Reporting Council, which is the UK independent regulator responsible for promoting high quality corporate governance. There needs to be more legitimacy of financial reporting building on best practice governance arrangements for these alternative structures . Some are after all of great public interest.

To really drive this agenda forward, the Government needs to commission a review with input from a wide range of experts into how best to support alternative business structures. It should ensure not only to capture some of the benefits listed but also to keep in focus the requirements of new internet based structures of crowdfunding and peer to peer contracting. Strong regard should be made also to ensure that prescribed structures are simple as can be for small entry level businesses and that they encourage rather than discourage entrepreneurialism and ‘better capitalism’.

Mark Austen is Chairman of LV=, the insurance, retirement and investment group