It isn’t a few bad apples – it’s the stupid system

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The pension implications of the collapse of Carillion are scandalous – as well as tragic for the people involved. Senior management used cash, debt and asset sales to pay out dividends and significant senior management salaries while starving both the business and its pension fund. Between 2012 and 2016, Carillion paid out dividends of £376 million while generating a mere £159 million in cash from operations.

Management bet the farm on mythical future cash flows. And they lost.

The Prime Minister’s reaction to these events is to promise to levy huge fines on employers who behave in this way. It’s the same old story – superficial thinking and shooting from the hip to blame ‘a few bad apples’ for the problem. She claims that ‘everyone should play by the rules’ and she will deliver a hard spanking (metaphorically speaking) when things go wrong.

It is true that Carillion’s management does not seem to have been either prudent or competent. But Mrs May’s reaction misses a crucial point.

The UK has chosen to adopt an economic model where shareholders are privileged above all other stakeholders. And where executive pay has been allowed to be tied to short term stock price performance. In such a system, it is inevitable that executives will, by and large, take a short term view and will do much to push up their stock price even if that hurts the long-term performance of the business. In behaving this way, they are, indeed, playing by the rules. Choices made and rules set by successive governments.

We covered all of this in detail and made specific recommendations in our report responding to the government’s Green Paper on Corporate Governance. What is clear is that this is not a problem of ‘a few bad apples’, as the PM claims. It is a systemic problem which, to a greater or lesser extent, pervades all of British business and the British economy.

Indignation and waving around threats of big fines may be the politically expedient thing to do. But it will achieve little. What is needed is to redraw the rules of the game so that executives are no longer incentivised to behave in these ways. We need system change not meaningless tinkering and the odd rap on the knuckles unconvincingly dressed up as decisive action.  And system change is what Radix is about.

Mrs May goes on to claim that “no government has done more than this one to take action in this area”. In fact, this government has been extremely timid. The proposals that emerged in the governance White Paper were highly disappointing.

That is why we are partnering with others to mount a campaign designed to move the UK beyond the shareholder economy model – a model which is highly destructive and economically and socially damaging. Let us know if you’d like to be part of it.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.

Comments

  1. Paul Gregory says

    I propose two further measures of an overarching nature directed at addressing many other problems at the same time.
    One is for manager bonuses (not salary) to be linked, by law, to taxable income generated. This might also take deferred taxable income into account.
    The other is a requirement that a specific (identifable) professional be responsible for each decision. That person would have to be a member of at least one professional body.
    In working life one inevitably makes some errors of judgement, but some people would seem to make many more poor judgement calls than others, and some would seem to be excessively partial to their own interests. Where a pattern of misjudgement emerges the individual must be called to account before a carefully constituted ethics committee of their professional association. This committee would include many outsiders, i.e. representatives of other professions. The individual would be able to make their case, which will sometimes be reasonable and well-founded, explaining (for instance) why they diverted from established practice or codes, it being understood that codes can never cover suitably all the circumstances and ground. However, if is is deemed, after due process, that the record or pattern of misjudgement is so gross that the person has behaved unprofessionally, they would face suspension or exclusion from their professional body, and therewith the end, for the time being at least, of their professional employment.
    Note that the mechanism proposed is devolved – i.e. bottom up. It is fundamentally democratic. Not because democracy is necessarily a good in itself, though I like to think it is, but because, being self-correcting, it tends to generate the best results.
    Note that all professions, including minor ones, are covered. It would also apply to civil servants. And judges. And lawyers. Let alone accountants.
    Note that dialogue is at the heart of the concept. You are not compelled to follow codes slavishly, but to provide an explanation when deviating from it. (Comply or explain.) You are only called to account when a pattern of apparent misconduct / misjudgement has been reported, not for an isolated event. (Think points on one’s driving license.) Exceptionally one might be called to account for obeying the rules (where this was stupid or corrupt).
    The concept is the response to the inability and incapacity of any legal system to respond to most misdeeds. At its heart is the idea is that what, apart from proper expertise, counts in a profession are good character and good judgement. (These are separate parameters.)
    Presently we would seem to have everywhere a system where there is no filtering out of the bad apples, which reproduce like the flies that settle on them, and where instead good people are held back or discouraged.
    Professionals who are used to obeying orders or bottom lines would be terrified and of a sudden grow a backbone.
    We could gradually dispense with many laws and regulations since their purpose could be better served with the proposed mechanism.
    It would be a generational shift, certainly, in mindset.
    I (British) have set out these ideas in my book, written in German: Klasse Verantwortung – Weichenstellungen für eine starke Mittelschicht (www.klasseverantwortung.de) And on my website fighting fake business ethics (www.contra-dnwe.de) which documents the subvertion of the business ethics movement by self-interested, authoritarian German academics and consultants.

  2. Peter Arnold says

    An excellent article which points the finger at the real problem bedevilling the UK’s economy – short-termism. Sustainable businesses plan for the long term, and that is what the legislative framework should encourage. It doesn’t at the minute, and that’s why the UK economy as a whole underperforms. It’s time for radical, fundamental change. Change is, after all, the natural rhythm of life, and we should be going with that flow. Count me in!

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