but first, the principles:
There are two political philosophies in this world:
The Right, which believes in individual decision making (and hence free
markets), recognising the value of flexibility and individual initiative as
circumstances demand.
& the Left, which believes in central, or collective decision making, which
recognises the value of coordination, synergies of collective action and
the interdependent nature of the economy (especially interesting to note
between different routes in a metropolitan public transport network), and
the fact that sometimes people will only favour a decision if everyone else
pays their fair share (because the action will benefit all and
"free-riders" are not wanted).
Both Left & Right have value.
When Clinton and Blair call for a third way between state socialism and
free market capitalism, the definition is in the question. The third way
is a balance between individual and central decision making.
Whilst principles of equality and inclusiveness etc. may be desirable
(depending on your personal opinion), to include them within the "third
way" is to miss the point. The third way is about the structure of society
and who makes what decisions. The ideals behind the decisions are
irrelevant, because unless you believe in idealistic dictatorships, what is
required is a decision making process that delivers what society desires.
For example, a socially concerned citizen on the Right might make donations
to charity, whereas one on the Left might vote for a Government that
promises higher welfare benefits. The difference is only in the decision
making process.
Of course compromise isn't a particularly inspiring term for a political
philosophy, but this isn't about a fudge-type compromise of principles.
The principle IS one of getting the balance right - "what works is what
matters". Perhaps such a definition can reconcile Blair's election-night
statement that "this is a vote against all ideologies" and his continual
espousal of "what works is what matters", with the present apparent need to
construct a new ("3rd way") ideology.
Perhaps a more inspiring term than "compromise", which also embodies the
principles more specifically, is "federalism". Charles Handy, the UK's
leading business guru (who predicted the wave of downsizing and outsourcing
that has now eventuated), is a strong advocate of federal organisations,
and compares the structure of successful competitive companies adopting
"tight-loose" management, with that of federal Goverment structure.
The principles of federalism include:
1. Getting the balance right between central and devolved decision making
(difficult, but worthwhile). The term "subsidiarity" sums this up. Note
that whilst business leaders usually extoll the virtues of free markets and
individual choice, they all also implicitly recognise the value of central
control and coordination - all companies have managing directors. The
European Union, and the devolution of power to Scotland, Wales and Northern
Ireland are of course other examples of federalism.
2. Accountability(#1) - combining responsibility with rights, so those
that make decisions are also responsible for them. e.g. employees are
given greater freedom to act as they see fit (necessary as technology and
society becomes more complex), but must accept termination of their
contracts if they fail to perform.
3. Accountability(#2) - The "Centre" should command with the respect and
consent of those whom it governs. e.g. Governments are elected. This
principle is presently missing from most companies.
So where do these principles lead us in terms of specific economic policies
and practical solutions?
The missing feature identified above is the democratic election of
companies' central controllers - the directors and managers.
Yet in fact in the most profitable companies - sharemarket listed companies
("publicly owned" PLCs) - this feature does exist, but is not recognised,
because the directors are elected by shareholders, but the shareholders are
usually represented by institutions on behalf of employees saving for a
pension, many of whom are themselves employees of the PLCs. (Note that
accountability requires that shareholders that control a company must also
carry the financial responsibility for their decisions.)
But because there is little competition in investment trusts (though this
is changing now), the institutions do not articulate all the desires of the
shareholders they represent. Consequently we have the ironical situation
that whilst employees would like to strike a balance between improving
productivity and profits, and maintaining or improving working conditions
(e.g. with reduced working hours), the only desire of shareholders
articulated by the institutions is to maximise profits (because their pay
is based on a fraction of these profits), and the result is
that companies can act in a way that actually adversely affects the
interests of some of their shareholders (those who are employees of the
PLC).
The solution then is greater competition in the management of investment
trusts. Employees should be allowed to choose (on an individual basis) the
managing trustees of their company pension fund. Legislation requiring
this choice is presently passing through the Australian parliament
(interestingly, by a visionless, conservative Government, and not for the
reasons articulated here).
The introduction of choice would allow employees to choose trustees who
offered company stewardship policies with an appropriate balance between
maximising investment growth for retirement and improving the working
conditions of the companies' employees.
In fact rather than these two requirements being conflicting, increasingly
companies are finding that their employees really are their greatest asset,
and looking after them is a necessary condition for continued growth and
profits (Charles Handy notes that physical assets typically account for
only one third of the total company share value, with the remainder
reflecting the revenue earning value of the employees). Consequently
employee share ownership is
increasingly being encouraged, because it encourages greater committment
amongst employees, making them more interested in company profits and
hence, for example, less likely to strike.
The advantage of indirect employee share ownership via competitive
investment trusts over direct employee share ownership is that it provides
a practical method for employees to vote on company management whilst at
the same time spreading investment risk over many companies and also
providing for some level of collective bargaining (although competition
requires that more than one trust might represent employees in any one
company).
What sort of investment trust would be in a good position to fulfil this
role?
Answer - one that the employees trusted to stand up for them, and not to
rip them off with big fees, or encourage mass sackings. i.e. Unions! (but
unions will have to accept competition to give employees choice over their
investment trust).
Imagine the following advert:
*************
Confused about choosing an investment trust for managing your pension
funds?
Do all trusts seem to offer returns that are better than average?
Invest with Union Investments, and we'll match them for returns.
But we'll do more than that.
Most investment trusts take little or no interest in the company they
invest in.
But we will. Because we know customers of Union Investments also work for
the companies we invest in.
And you, our customers, want us, as representatives of you the
shareholders, to look after you as employees, ensuring you're fairly paid
and have good working conditions.
We'll turn up to your company shareholder meetings and vote for you, the
employees. And we'll be committed to investing and growing your company.
And if your boss doesn't deserve that huge bonus, we'll vote against it
(and if he does, we'll support him).
We'll even provide you with a shareholder discount card, so you can claim
discounts on products from any of the companies we invest in.
At present Union Investments holds shares in the following companies:
(list of companies)
If you work in any of these companies, ring 1800 xxxxxx (toll free), and
we'll send you a form to transfer management of your pension fund to us.
If you don't work in these companies, ring us anyway, and we'll consider
making new investments in your company.
Invest with Union Investments, and we'll invest in you.
************
Note the last line - "we'll invest in you" - attempts to advertise the
benefits of investment as an additional positive feature. All investments
yield returns as interest and/or capital growth, but they also deliver
benefits to the borrower - otherwise the money wouldn't be borrowed. Like
all trade transactions, there are benefits to both parties. Thus if an
investor invests in his employing company he will reap the benefits from
both sides of the trade.
Note also that because labour markets can never be completely flexible, and
thus employees must always make some level of committment to a company by
working for it, they may have greater committment towards its long term
future than external investors, and less likely to desert it (or sell to a
predatory competitor) in times of trouble.
Thus employee stakeholders could provide more committed investment than
external investors, thus perhaps combatting the short-termism of the stock
market so decried by observers such as Will Hutton.
Notice that the investment trust still spreads risk across many companies,
and thus employees are required to act collectively. i.e. all employees
say to each other, "I'll invest in your company and vote for fair working
conditions if you do likewise for my company."
To compare this scenario with ethical investment trusts is to miss the
point. Ethical investment trusts by their very title suggest to their
customers that some sort of benelovent sacrifice is being asked of them.
But "Union Investments" appeal directly to the "selfish" demands of
employees - offering to deliver what they want both in terms of investment
growth and working conditions.
But what happens when increased company profits and employment levels are
incompatible? i.e. when new efficient technology is required to compete,
and this will lead to redundancies? In this situation the investment
trustees must balance the demands of their customers to maintain employment
versus the demands to maintain and grow share value, and if this is
incompatible then they should (a) vote for fair redundancy payments out of
the increased profitability of the company, and (b) help their redundant
customers find new jobs. i.e. Investment trusts (& Unions) should also
offer employment agency services (& perhaps retraining too). In fact, by
continually offering such services to their customers at all times, they
will increase the bargaining power of employees (who will find it easier to
move elsewhere if they are unhappy with their present working conditions),
and could even approach the company to suggest redundancies when it was in
the interests of all concerned.
The combination of these services offered by investment trusts/Unions -
i.e. savings for retirement (or unemployment), collective bargaining, job
searching, retraining and perhaps banking, tax advice and home loans too -
would allow them to become "Employment Service Companies" - offering a
complete employment and financial managent service.
What evidence is there that such a scenario might actually eventuate? In
fact, quite a substantial amount. It was already mentioned above that
Australian employees will soon get choice over their investment trust
managers. Competition in employment agencies has also recently been
introduced in Australia, with the privatisation and break up of the
Government
employment service. Charles Handy also sees an increasing need for
employment agencies in increasingly flexible labour markets.
The growth of PLCs is also leading some (perhaps prematurely) to claim the
victory of Anglo-Saxon capitalism over alternative European and Asian
models, so PLCs seem a inevitable major part of future society (for good
reason - they provide low cost finance for investments which are
increasingly knowledge rather than physical asset based, and hence being of
higher risk with no collateral to back the loan, require the easy "escape
route" ("liquidity") offered by share markets). Personal Equity Plans
("PEP"s)
are also now booming in popularity (after a shaky start).
Financial services are experiencing greater competition (and blurring their
distinctions), with new competitors such as supermarkets entering the field
with greater customer focus. Traditional banks have failed to
preferentially invest in their customers' (depositers') surrounding
community, but because local businesses such as supermarkets depend on a
vibrant local economy (unlike a bank which can borrow and lend money
anywhere in the world), they may be more inclined to invest in it (and
their own business), because their business will also reap the benefits of
the investment. This would allow them to offer higher interest rates (as
supermarkets are doing) and thus attract more customers. i.e. competitive
pressures could well encourage such "stakeholder investment" patterns.
Additionally there is evidence from other markets. Common features of new
and evolving markets are an initial focus on price as costs are reduced
(i.e. salaries of stockmarket dealers and fund managers), but then as
profits become reduced to undesirably small levels, competitors try to
"differentiate" their product from their competitor's, thus creating a
narrowly defined monopoly market for themselves, and so allowing increased
profits.
In the case of the investment trust market, the product is rather unusual
in that it is hard to define the product when returns are not guaranteed,
and therefore hard for customers to differentiate between different
suppliers. The "bundling" of employee-favourable company stewardship
policies thus offers a tangible (if not quantitative) way of
differentiating an investment product.
An additional bundled feature mentioned in the advert above was the
offering of customer loyalty discounts. Such "frequent flyer" discounts
are becoming increasingly popular throughout the economy (especially in
collaboration with financial services such as credit cards), because they
reduce company risk by encouraging stable customer revenues, and reward
customers for this reduced risk through product discounts. They are also
more cost reflective, because any product or service provided by a company
involves initial fixed up-front investment costs, plus "marginal" costs of
increased output. Customers who make a bigger contribution to paying off
the fixed costs (through share purchases or many product purchases) should
therefore pay product prices that are nearer to their marginal cost of
production.
Investment trusts could also offer customer-focussed company stewardship
policies. This could be of particular importance for natural monopolies
such as water, electricity distribution, public transport or football
clubs. For example, investment trusts could offer to strike a balance
between investment returns and better public transport services and prices.
Since customers may want many different demands from their investments,
trusts may form alliances with partners and allow customers to tailore
their product for their own desires. For example, customers could tick a
box on an investment trust management form indicating that they would like
their football club investments to be managed by the football supporters
association.
Thus the surprising conclusion of all the above is that shareholder
capitalism
and competitive markets can deliver a "stakeholder society" - where the
stakeholders in a business - the employees and customers - become the
investors and owners, and thus exert influence on its strategic management.
The central coordinating management thus adopts the federal ("3rd way")
principle of governance by consent.
The above scenario provides some direction for potential Government policy
initiatives:
Firstly, choice and competition in pension fund management is required. An
industry competition regulator should ensure against punitive fees for
transfer of trust management from one company to another.
Greater competition is also required with employment agencies. Government
services should be privatised so as to create incentives for providing best
service, and also because the mere existence of a state-subsidised body
makes it difficult for other organisations (e.g. Unions) to compete on a
fair basis.
PLCs should be encouraged, for example by minimising establishment costs
through the introduction of greater competition with a second British stock
market.
Natural monopolies should be required to have a minimum level (e.g. 50%) of
customer ownership.
The Government should also ensure taxation policy does not bias against
indirect employee share ownership (via investment trusts). Such a bias
would exist if it were more expensive for a company to pay employees via
dividends than via the usual pay packet, which would be the case if
dividends were subject to both corporation and income tax.
What about those that can't afford to save for a private pension?
Consideration of the above suggests that Government funded pensions have
been the biggest mistake of the Left - they disenfranchise the low paid by
taxing them so much as to leave no funds left for personal saving (&/or
discouraging it because of the existence of a guaranteed state pension),
thus preventing their voice from being heard on the management of
companies (leading to a vicious circle of poor working conditions and low
pay).
The state pension should thus be replaced with personal equity plans -
boosted for the low paid by Government payments (funded by top rate income
tax), but managed by trusts chosen by the recipient.
Welfare payments should also be made through the private employment
agency/investment trust of the recipients choice, with payments perhaps
being structured to encourage agencies to find work preferentially for the
long-term unemployed. (this will be discussed at greater length in a second
email on flexible labour markets,to follow this one).
Finally, when the employment agency industry has sufficiently developed to
significantly help average and low-paid workers continually searching for
better jobs, then it could be argued that flexible labour markets should be
encouraged, for a variety of reasons discussed in the following email, but
perhaps also because job insecurity encourages saving, and thus could
encourage the development of the stakeholder society described above.
David Thorp (Dr.)
d.thorp@unsw.edu.au
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