Text of recent Fund Strategy cover

This is the main text of my Fund Strategy cover story published on Monday. I have restored the original introductory paragraph that for some reason was edited out of the published version. I will post the boxes that go along with the article over the next few days.

An unprecedented hostility to business has recently enveloped contemporary society. That may seem a strange thing to say given an earlier history of two centuries of socialist agitation. But today’s anti-corporate culture, with its hostility to big business in particular, takes peculiar and convoluted forms.

Admittedly hardly anyone, even among the Occupy protestors, is calling for an overthrow of the capitalist system. Nor are there any credible alternatives to the market economy on the horizon. Instead, there is a powerful impulse to restrain business activity at work.

This drive to curb business is expressed in many different ways. Recently some leading British politicians have made calls for “responsible capitalism”, implying that many forms of capitalism are irresponsible. Companies are constantly being implored to behave in ethical, fair and sustainable ways, while avoiding greed and excess.

Such terms are not simply words describing particular forms of behaviour. They usually come with demands for more prescriptive regulations attached. But it would be wrong to see such initiatives as simply being imposed on companies by power-hungry politicians. On the contrary, the political discussion runs parallel with a debate inside business itself.

The talk of responsible business should not be dismissed as “greenwash”: firms engaging in cynical public relations spin to promote their ethical credentials.

The new forms of regulation take many guises. Companies have to accept elaborate corporate governance codes, respect sustainability and behave ethically. Risk management has also become a central part of their activity. Although the drive to restrain business exists across the developed world, this article will focus on Britain.

First, it will examine the discussion about responsible capitalism among political leaders and their intellectual backers. The striking thing about the debate is the extent of overlap between the main parties, rather than what divides them. All argue that firms often behave irresponsibly, that remuneration can be excessive and that there is a danger of businesses corrupting the political system. Banks, in particular, are seen as the epitome of this culture of greed.

Next, it will look more closely at the debate within business itself, especially in relation to discussions on corporate governance codes, risk management and social responsibility.

Then it will put the present round of regulations into context by comparing it with the past. Although politicians typically claim to sit within longstanding traditions, many recent developments are unprecedented.

Finally, it will draw conclusions about the damaging impact of the culture of business restraint. Contemporary attacks on business rarely take a direct form. In the absence of an alternative to the market economy, it is hard to imagine a world without companies playing a central role. Instead, corporate activity is routinely viewed with anxiety and often condemned for its alleged excess. This leads to a drive to constrain firms in numerous ways rather than a call to abolish business.

Not all businesses are regarded with equal disdain in this discussion. On the contrary, small companies are often lauded as local and sustainable. In contrast large firms, particularly those with substantial international activities, elicit a great deal of distrust.

Banks, particularly investment banks, are commonly seen as the worst of all. They are widely viewed as players in a giant casino, with no compunction about using ordinary people as chips in their power games. Banks are perceived to be undermining the fabric of society by institutionalising corruption and greed.

This range of charges against business is often made indirectly. It is embodied in several different, although related, discussions. By examining some of the main ones, it is possible to start discerning the patterns at work.

Many leading politicians, from the prime minister down, have made several calls for responsible capitalism in recent years. All the main parties are intent on emphasising that business should behave properly.

Perhaps the best place to start is the Conservative party. Historically, the Tories have always been the party closest to Britain’s business community. Even today, Conservative leaders are eager to emphasise their pro-business credentials. But a closer examination of contemporary Conservatism shows its support for business comes with numerous caveats.

Take David Cameron’s speech in 2009 to the World Economic Forum in Davos, when he was still the leader of the opposition. Back then, he talked of “updating the old free-market orthodoxy”. He identified three main reasons why capitalism had become so unpopular.

• Its apparent lack of a moral framework. Under this heading he argued “the roots of the current crisis lie in recklessness and greed”.
• The disconnection between people’s lives at a local level and of global business.
• What he called “the incredible inequality of the modern world”.

From these premises he drew conclusions about changes needed to society and to business in particular. “That is what I mean by responsible business,” he said. “Business helping to create a society that is greener, safer, fairer – and where opportunity is more equal. Business helping to create a society that is more family-friendly, where responsibility and power are decentralised, and where we value and build up the institutions of the public realm and civic society.”

The striking thing about this framework is its considerable overlap with that demanded by self-proclaimed critics of capitalism. Indeed, given these points alone, without the speaker’s name, many would probably assume it came from an Occupy activist. Yet Cameron’s speech was made more than two years before the Occupy protests began. All the key elements are widely viewed as radical today: its focus on social inequality as a key problem; its emphasis on the local over the global; the support for greenness; and the need for a moral framework.

It is also worth noting in passing that even in relation to mainstream economic policy Cameron’s view, rightly or wrongly, was a long way from free-market orthodoxy. He explicitly supported monetary activism, arguing that in this sphere “the old rules should be torn up”. Cameron even supported the idea of a fiscal stimulus in principle. The main point differentiating him from other parties was his claim that Britain was not in a position to engage in such a stimulus.

Nor was Cameron’s speech in 2009 an aberration. He has made several others along similar lines since becoming prime minister in 2010. For example, in January this year he argued that the crisis should be used as an opportunity to improve capitalism and make it more popular. He used the opportunity to attack “corporate excess” and assert the need to challenge vested interests, including big business. Cameron also emphasised the need for corporate social responsibility (CSR).

Such ideas are in line with those of some of his key advisers. For instance, Phillip Blond has promoted “Red Tory” ideas, which combine economic egalitarianism with social conservatism. He attacks Margaret Thatcher’s individualism and instead talks of reviving a civic life with thousands of small-scale communities.

Steve Hilton, a close confidant of Cameron’s, was director of strategy for Number 10 until earlier this year. Hilton had previously advised companies on CSR and was another passionate advocate of local communities. Both Blond and Hilton are referred to as advocates of Cameron’s “Big Society”.

Despite slight differences in rhetoric, the broad thrust of the Labour Party’s attitude to responsible capitalism is remarkably similar to Cameron’s. Like the Conservative leader, Ed Miliband, the Labour leader, has often talked on the subject. Indeed, he gave a key speech on the same day as Cameron’s recent pronouncements cited above. Among the themes Miliband stressed were the damaging effects of inequality, the over-reliance on finance and the need for businesses to be “responsible”.

Like his Conservative counterpart, the Labour leader also has an intellectual guru. Maurice Glasman, ennobled in 2010, has a background as much in community organising as academia. This advocate of what has come to be known as “Blue Labour” is also preoccupied with the need to strengthen communities. He is highly critical of finance and advocates restrains on business in general. As Glasman advised the Labour Party in an article in the Guardian: “In its explanation of the crash it must point to the volatility and vice of finance capital and the necessity of a balance of power within the firm and stronger institutions to constrain capital and domesticate its destructive energy” (April 24, 2011).

If anything, the Liberal Democrats are even more comfortable with the notion of responsible capitalism than even the Conservatives or Labour. This is because the Lib Dems have long played the role of quintessential party of the middle: condemning the Tories for their ties to big business and Labour for its ties to organised labour.

From this perspective it is not surprising that both Nick Clegg, the Liberal Democrat leader, and Vince Cable, the coalition business secretary, are fond of the moniker “pinstripe Scargills” to describe investment bankers. This gets across their disdain for what they see as greedy capitalists and their dislike for trade unions.

All the parties, therefore, emphasise similar themes. They all claim to be pro-business but at the same time they want it to behave ethically, fairly and responsibly. All are critical of what they regard as excessive remuneration – although there is a lot of room to debate exactly what constitutes excess. At various times they have also all complained about unscrupulous businessmen corrupting the political system. For all three parties, investment banking is the epitome of excess and greed in contemporary society.

This discussion among politicians is reflected among academics and the mainstream media. There is a substantial genre of books, including George Monbiot’s Captive State (2000) and Noreena Hertz’s The Silent Takeover (2001), alleging that big business has taken over and corrupted government. Even the Economist, widely seen as a free-market publication, has described itself as “pro-market, not pro-business” (June 26, 2003).

All this could be described as the anxious middle outlook. It is middle class in the literal sense of being nervous about the behaviour of big business and the mass of society. Its instinct is to curb what it regards as excess at both the top and bottom of the social ladder.

In relation to business, this means finding many ways to regulate its activity so that it does not lead to social fragmentation. For financial institutions in particular, this means tight new regulations on its operations.

Those who see this discussion as purely existing in the political realm are mistaken. Nor is it a matter of politicians imposing their views on an unwilling business community. On the contrary, corporate leaders have internalised this general anxiety about their own activities. Businesspeople are often the most avid advocates of the measures that have evolved to regulate business in recent years. The rejection of excess and fear of social fragmentation provides the foundation for the extensive new framework for business regulation that has emerged since the 1980s.

This is not simply a question of governments passing even more laws. Instead, it has meant the creation of new forms of regulation around a cluster of related concepts: business ethics; corporate governance; CSR; and sustainability. The rise of the importance of risk management within firms is a closely related development.

Take corporate governance as an example. Although the proper running of companies is not a new discussion, one study argues the term itself was not used before the 1980s.

Certainly, it was only in the 1990s that it became a central topic of debate (see box above, The rise of corporate governance). For more than two decades, companies have had to follow detailed rules on how they are organised and how remuneration is paid.

Despite the difference in terminology the debates about ethics, responsibility and sustainability all embody broadly similar themes. All assume that companies must accept limits on their activities. For environmental and social reasons, it is accepted that they must limit their footprints.

The flip side of this argument is that they should focus on other activities outside their traditional remit. By implication at least, they should lessen the priority accorded to growth and profits.

The rise of risk management is a parallel trend. It is now widely regarded as a core activity of business, rather than a specialist function.

Businesses are expected to be exceedingly cautious in all their operations. These themes are explored in more detail in The Timid Corporation (2003) by Ben Hunt, who is a fellow contributor to Fund Strategy, and Michael Power’s The Risk Management of Everything (2004).

Contemporary critics of corporations almost invariably argue that they are working within a well-defined tradition. Politicians, for instance, habitually claim the measures they propose are consistent with the best in the traditions they represent.

Such claims lack a proper sense of history. They project a false continuity into the past rather than seeking to identify what is novel about recent developments.

Three different examples help to illustrate this point. First, both businesses and politicians have become far more cautious than in the past. The days when businesses self-confidently pursued profits and politicians advocated unqualified economic growth are long gone. Nowadays, support for such goals is routinely surrounded by numerous caveats. Ambition and aspiration are recast as greed and excess.

Second, the main political parties are no longer pursuing their traditional roles. Labour has ceded its role as the political wing of the trade unions and the Conservatives are keen to keep some distance from big business. Both parties have moved closer to the Liberal Democrat terrain, seeing themselves as representatives of the respectable middle.

Finally, politics in its proper sense – as a clash of ideas and interests – no longer exists. Instead, politicians are expected to behave as altruistic souls. This shift explains why attempts by organised interests to influence government, which previously would have been seen as normal, are nowadays cast as improper.

The retreat from politics also helps explain the rise of CSR. Matters that in an earlier era would have been viewed as the province of politics are now often seen as under the purview of business. In that sense, CSR can be seen as an anti-political movement.

It is not necessary to be an avid free marketer to see problems with the developments sketched above (see box, Naked self-interest). The obsession with curbing excess is bad from both an economic and a political perspective.

On the business side, it means companies have to operate in a climate of extreme caution. Any attempt at bold initiatives is likely to be viewed with suspicion, fear and even hostility. It also means businesses have to negotiate a system of regulation of unprecedented complexity.

At the same time, what passes for politics has become degraded. Politicians no longer try to shape society on the basis of any kind of positive vision. Instead, their emphasis is on regulating the behaviour of both individuals and of corporations. The emphasis on responsibility amounts to a warning that everyone needs to be willing to follow prescriptive rules.

The responsible capitalism agenda presents a formidable barrier to the promotion of prosperity.