Debate on the Address

My Lords, we have a strong economy, with the longest period of sustained low inflation since the 1960s; growth of over 25 per cent since the Government came to office compared with 15 per cent in the nine years prior; interest rates low by historic standards; mortgage rates at their lowest sustained level for 50 years and record numbers in employment—2.5 million higher than in 1997. The recent OECD survey ranked the United Kingdom first for all measures of economic stability, describing the UK as a ““paragon of stability””. We have also seen the Government take steps to lift significant numbers of children and pensioners out of poverty, as well as to improve the position of the lowest paid at work through, first, the introduction of the minimum wage and, subsequently, by increasing the level of the minimum wage. Through such measures, as well as those addressing social exclusion, the Government have sought, allied to a stable and thriving economy, to provide the foundations for a fairer and more cohesive society. However, not all developments and trends appear to be working in this direction. Many of your Lordships have rightly referred to the important contribution made to our economy by the financial markets, and I would not want my agreement with that point to be forgotten. Changes in the way that the financial markets work, though, are creating an environment that is geared more than would seem desirable to a short-term approach to investment. The changes in the financial markets are many. More extensive use of stock options, particularly when applied to senior directors, creates considerable incentives for top managers to give priority to raising stock prices, which only encourages short-term thinking. A more market-driven pension system is leading to pension fund managers investing in riskier assets, changing their portfolios more frequently, reducing firms’ certainty with regard to future funding, and intensifying pressure for higher returns from their investments in productive companies, thus depriving the latter of much-needed resources. The expansion of private equity funds does not promote economic stability. Investment by such funds is frequently highly leveraged, with the buy-out debt financed, and the firm purchased left saddled with responsibility for servicing the debt. The strategy for investment by such funds is too often asset stripping or restructuring, leading to jobs being lost and established companies being destroyed, while the ones who benefit most appear to be the fund managers. Gate Gourmet, of Heathrow airport fame, is one example of what can happen when an organisation is bought by a private equity firm which, in this instance, hired hundreds of contract workers before carrying out the next stage of the strategy, which was to attack the existing workforce, many of whom were Asian, and their working conditions. Takeovers where the driving force is a high and quick return do not promote stability. The threat of takeovers also influences thinking. The desire to minimise the threat of a hostile takeover results in the existing management taking action to raise the company’s share price in the short run, through measures such as deferring investment and creating redundancies, which have a negative effect on the longer-term performance of the company. A significant part of the UK economy is now controlled by private equity players, who determine the futures of one in five private sector employees. Despite that, and the investment of company and private retirement funds in this sphere, the industry is unaccountable and lacking in transparency in comparison with public companies. The expansion of hedge funds has been dramatic. Something like 70 per cent of Europe’s hedge funds are London-based—except, of course, for tax purposes. The funds that they manage are equal to the gross domestic product of the eighth largest economy in the world, namely Brazil. Such relatively unregulated investment funds adopt unconventional investment strategies in pursuit of their scarcely-disguised goal of a rapid double figure return. The goals of the longer-term investor are not for them. Objectives such as improvements in production or services, consumer needs, new product lines and increased productive capacity are not at the forefront of the minds of hedge fund managers. Even though the objective is to gain control of companies, the managers of hedge funds do not then see themselves as employers, committed to invest in and develop both the company and the relationship with the staff. They want, and all too often achieve, a commitment that is without obligation, and one in which there are no barriers to taking whatever action they intend in the quest for a quick and significant financial return. In theory, they are hedging risk, but they are also speculating, and economic stability, long-standing firms and industries, and jobs are the pawns on their chessboard. A short-term approach also impacts on future generations. If the capital markets seem to be moving more towards the short-term investment approach that is geared to a rapid financial return, where does that leave us in the future over the funding of research and development and innovation, which requires a very different approach? Climate change and renewable energy are issues that have moved rapidly up the scale, and much-needed investment in environmental technology is unlikely to interest those seeking quick financial returns. The changes in the way that financial markets work have been a factor in the dramatic increases in remuneration in the sector, particularly in London. It has been reported that at least 3,000 people received bonuses of £1 million or more for last year. That was not a unique occurrence; it has happened in previous years and is likely to happen again in the next few months, with predictions of 4,200 people receiving bonuses of £1 million or more, with bonuses in the City totalling £8.8 billion. The situation is similar at the highest level in Britain’s largest companies. Over the past 12-month period, boardroom earnings rose by 28 per cent, seven times faster than average earnings and nearly twice the increase in the FTSE 100 index. That was not a one-off, since the latest figures simply repeat rises of 16 per cent, 13 per cent and 23 per cent over the previous three years. The argument advanced is that such increases reflect achievement, but it falls down when it becomes clear that, leaving aside their size, the increases are too often not related to the performance of a company. The other argument is that repeated increases of such magnitude are needed to remain competitive. That is a very convenient argument but one that the organisations and individuals involved never risk allowing to be exposed to public scrutiny. A great many others in the world of business and commerce, technology, manufacturing and engineering, research and development and public service achieve and bring great benefit to the community and the economy, just like those in the financial markets—but they do not receive or expect increased remuneration packages that are way in excess of everyone else in return for delivering and remaining in their posts. The overwhelming majority of companies and organisations will seek to ensure that work brings a fair, but not excessive, reward and, for some, that approach will mean high rewards. The evidence though is that in recent years that approach is being interpreted rather differently in some boardrooms and in certain parts of the financial markets than it is everywhere else. There is now a rapidly widening gap between those receiving the highest incomes and both those at the bottom end of the income pile and those on average earnings. With the changed priorities in some parts of the financial markets, and the implications for company stability and development, for jobs, and for the longer-term commitment to a firm of those who own it, these are developments that do not assist in achieving a fairer and more socially cohesive society, which ought to be as much a goal of any Government as economic growth and prosperity.