Imagine you're in Boston managing a portfolio of international equities. It's 14 months to a UK general election which the left-of-centre Labour Party will probably win. What do you do?
Nothing. It's too early to tell whether the effect of the election will be more than a blip on the political-economic map of Europe.
However, the wise Bostonian is gathering information about Britain's new-look Labour Party. This may help him or her decide if a change in government will trigger just a small correction in the UK markets or a fundamental change.
Stuart Bell, Labour spokesman on corpor-ate affairs, visited New York and Boston last October, courtesy of UK merchant bank Kleinwort Benson, and attempted to allay investors' fears. It was an opportunity for New Labour and the most important investment community in the world to meet.
Bell, a former international lawyer - tall, soft-spoken - could pass as an investor himself. But at a dinner in New York for Kleinwort's investment clients his remarks on plans for a windfall tax on the profits of British utilities "didn't go down too well", says an eyewitness. "You could see his audience taking note that the cost of capital in the UK would rise." (They might have forgotten, or may never have noticed, that it was a Conservative government which gouged a windfall tax from the banks in 1981.)
US investors are still asking fundamental, perhaps naive questions about the Labour Party: How much experience does it have of government? Won't it fall into the old vice of tax and spend? Can it manage the UK economy and perform as the party of fairness?
By the third and last day of his trip, Bell had learned to calm his audience with positive pro-market speak and more guarded vagueness about Labour policies. He let it be understood that his party doesn't need to make promises to get elected.
For foreign investors that may be good enough. One US investor with five years' experience in the UK feels less threatened by a Labour victory than he would have been 10 to 15 years ago. Gilman Gunn, head of international investment at Keystone Distributors in Boston, sees a Labour Party which has "little room for manoeuvre" on fiscal and borrowing policy, because of the EU's Maastricht criteria on debt, budget deficit and inflation, which Labour aspires to. He sees a Labour Party "trying to tone down its policies", and a "malaise in the Tory government" which suggests it may be time for a change.
Before the election - whether it's in October this year, as Kleinwort Benson predicts, or at the latest possible date, May 22 1997 - Labour will keep plugging away at the international investment community, assuring fund managers that the old Labour bugbears are banished forever, and that, with foreign investors' support, there needn't be a run on sterling.
Comical reluctance
Shadow chancellor of the exchequer (finance minister) Gordon Brown will visit the US this month and will tour France and Germany in May. Labour leader Tony Blair will visit US president Bill Clinton in April and speak to the US-UK Chamber of Commerce in New York. His tour to Singapore and Japan in January gave leading east Asian businessmen a hint of his long-term plans for the British economy.
As a profile-raising exercise abroad, this may be sufficient. But at home, there is rising impatience in the financial community, even among the Labour faithful, that these people don't know what they're talking about. They won't be drawn into debate on the nitty-gritty. Senior Labour politicians show an almost comical reluctance to spell out their future government's policies.
There is a tactical reason for this. Labour veterans have painful memories of the detailed election manifesto of 1983, dubbed "the longest suicide note in political history". They're not going to blow their chances this time with cacophonous and discordant utterances from the shadow cabinet. Labour's shadow treasury and Department of Trade and Industry (DTI) teams are almost too bland and harmonious in their teamwork, as if Blair had put a gag on free thought. "The Tories taught them that lesson," says an investment banker. "There's no value in internal divisions." Hence the bridle on shadow ministers commenting on anything approaching firm policy. "Remember where they've come from," says Chris Haskins, chairman of Northern Foods. "They're having to make policy without the great Whitehall system behind them. I'd like to see a bit more, but, like them, I'd be inclined to keep my powder dry."
Alistair Darling, Labour's spokesman on financial affairs, spent most of a meeting on February 12 with the great and good of British finance - regulators, former regulators, bankers and academics - dodging attempts to nail down Labour's plans for the financial sector. "I'm wary of grand plans," he countered. But, he hinted, "we're talking about fewer rules". And he added: "Whatever works best is what we want."
Darling is a former barrister, skilled at the measured response (see interview), but he gives no comfort that Labour knows where it's going in the financial sector. It is as though the shadow treasury were putting their plans for the sector out to tender, waiting for the bids to come in, not only looking for the best price, but also for some ideas.
To those used to the conviction politics of the 1980s this may seem odd. But for optimists it's an opportunity: here is the Labour Party offering its services as an agent of reform and change in the financial area. Its policies haven't solidified - yet: they're open to suggestion. New Labour, as it calls itself, is approaching the question apparently without a hidden ideological agenda - or without a fixed idea in its head. One member of the party faithful sees this as a step forward: "A few years ago policy would have been decided at a party conference."
The regulation of London's financial markets is in urgent need of reform. Few practitioners would deny this. The Securities & Investments Board (SIB), the watchdog of the financial self-regulatory organizations (SROs), wants more teeth and fewer regulatory overlaps. There is confusion between the roles of the UK treasury, the DTI, the Bank of England, the SIB and the various SROs and on how they handle the two main functions of supervision: prudential supervision to guard against systemic risk, and business-conduct supervision to protect the consumer. The Financial Services Act (FSA), which triggered London's Big Bang in October 1986, understandably didn't quite foresee the gigantic development of the wholesale financial markets. Now, because of the expense and confusion of multiple regulation, and possible blind spots, it is time to rationalize and improve the act. An incoming Labour government open to new ideas will find this easier than a tired Conservative administration.
That, at least, is the thinking of Michael Taylor, lecturer in finance at London's Guildhall University, whose blueprint for a new dual structure of financial regulation (Twin Peaks), was discussed at that meeting with Darling, arranged by London's Centre for the Study of Financial Innovation. Taylor, formerly at the Bank of England, believes there is an opportunity for reform now which won't be just a knee-jerk reaction to some financial disaster. "A government which can get regulation right," he encouraged Darling, "will win a lot of friends in the City."
But how good is Labour at getting the right advice? As an opposition party it has no direct access to official sources such as civil servants in the treasury, the Bank of England or the DTI. Until 1993 its main source of research was the Labour Finance & Industry Group (LFIG), a kind of alternative civil service. But this has always been hampered by the fact that participants are members of the Labour Party, although LFIG has striven to avoid factious party politics. With a sudden rush of new party members last autumn there was a danger LFIG would turn into something else, a battleground between Old Labour and New Labour ideologies. But the civil-service ethos was quickly restored, say party insiders. Other sources of ideas and assistance are the Fabian Society and the independent but left-leaning Institute for Public Policy Research (IPPR).
In 1993 Gerald Frankel, a deputy chairman of LFIG, with the weakness of its partisanship in mind, founded the more arms-length Industry Forum. "One of the reasons I started it was out of sheer disgust that opposition parties can't get access or funds for research," says Frankel, who is the forum's chairman. Nick Matthews, who was its first secretary, underlines its catholic nature: "You don't have to be even remotely sympathetic to the Labour Party; an interest in public policy development will do."
The Industry Forum now has around 300 corporate or individual members, including AT&T (UK), Cargill, Hambros, ICL and the Institute of Directors. It is open to anyone involved in business or the City professions, most of whom are asked to pay a £500 annual contribution towards costs. Membership took off when Tony Blair became party leader and especially after he had the party conference vote for the removal of Clause Four of Labour's constitution, which called for public ownership of the means of production and exchange. "The trickle has become a flood," says Matthews, who now works on industry policy at party HQ in Walworth Road.
Last month the forum went public on six task forces set up to study aspects of business and finance: one, on City and financial services, is chaired by Stuart Bell, and includes experts from JP Morgan, Hambros, NatWest, and a former adviser to the Bank of England. "I'm there as an individual, I'm not representing my firm," says Geoff Lindey of JP Morgan Investment Management. He's not a member of the Labour Party but would like to see it get good advice. At meetings of the forum he recalls some "very robust discussions at which prejudices and dogmas were being challenged". In discussions on market liquidity, short-termism and its impact on capital formation, "one member of the Labour Party took a very pragmatic view, insisting 'this is the way markets work'".
But the Industry Forum stops short of policy-making: lobbying for special interests is taboo. "We're not going to rewrite policy for £500," says Matthews, "for £5 million, possibly."
The LFIG has its own study groups which are closer to writing policy, but LFIG members are resigned to producing documents without knowing their ultimate fate. "We're merely the workers in the vineyard," says Tony Smith, a former finance director, who chairs the LFIG's City Study Group. "We don't take political initiatives. We can call on a lot of different brains. But what the shadow cabinet does with our work is their business." The LFIG's City Study Group is working on four topics: reform of UK banking, funding for industry, insider dealing and financial regulation.
Mads Andenas, director of the centre of European law at King's College, London, heads the group looking at alternative regulatory structures. "The only starting point we have," says Andenas, "is that the present system is unsatisfactory." But there is some urgency. This group had its first meeting in February and is expected to produce some guidelines by May at the latest. Andenas emphasizes the group's job is not to set policy, but to explore two main themes. The first is better coordination of regulation, trying to answer the question: "Do you need a coordinated central regulator, or is it possible to get free-standing independent regulators to coordinate?" Andenas points out that the SIB, as mentioned in a report by its chairman, Sir Andrew Large, has strict disciplinary powers which so far "it just hasn't used". The second quest: can Labour come up with a structure for financial regulation that distinguishes it from what the Conservatives might do?
The existence of this LFIG group, and its blank sheet of paper, suggests Labour doesn't yet have a blueprint for regulation, even in the recesses of the shadow cabinet. Darling insists that getting the philosophy of regulation right is more important, but less newsworthy, than imposing new structures. The broad philosophy is that there should be a guard against systemic risk, and consumer protection, with sharp enough teeth to be effective, but a minimum of red tape, to avoid distorting the market.
"A generalized approach won't do, because we're dealing with several different [financial] industries," says Darling. Labour doesn't regard the sector as a "greenfield site - that would be costly and damaging", he says. Nor does it fancy imitating a foreign structure, such as the US Securities & Exchange Commission (SEC): "I'm not keen on the SEC's excessively legalistic nature."
Revamping financial regulation is not Labour's top priority. The party may recommend changes in codes of practice even before the election, but any reform of the law - the Companies Act or Financial Services Act - is unlikely to be tackled before the second session of a Labour-controlled parliament, in October 1998, says corporate affairs spokesman Bell. That leaves plenty of time to get lobbying if you haven't already.
City supporters club
Access to top Labour politicians has become harder as their chances of forming the next government have increased. A handful of advisers and known Labour sympathizers can provide access to their thinking, if not to them. Derek Scott, economics director at BZW, works two days a week as economic adviser to Tony Blair. Peter Fanning, structured-debt expert at NatWest, is on secondment to shadow chief secretary to the treasury Andrew Smith; former Financial Times leader writer Ed Balls works with Gordon Brown. Left-leaning city economists include Gavyn Davies at Goldman Sachs, Neil McKinnon at Citibank and Gerry Holtham, formerly with Lehman Brothers, now director of the IPPR.
There are also well-known City figures who have long been in the Labour camp - Lord (Clive) Hollick, group managing director of media and financial services group MAI, Lord (Simon) Haskel chairman of the Perrott Group, and Jonathan Charkham, a director of Great Universal Stores.
Then there are the armies of consultants and political lobbyists, some of whom have hastily changed their political complexion or hired people with Labour Party credentials. Some consultancies which always had good Labour connections are now heavily in demand: Richard Faulkner, three times a Labour parliamentary candidate, at Westminster Communications; Tony Page at GJW Government Relations; and David Pitt-Watson, of Braxton Associates, who is deputy chairman at LFIG.
There are also the many sympathizers in the City who would like to have some input, but haven't, because of possible career repercussions, or because they haven't been asked. Terry Smith of stockbrokers Collins Stewart, whose 1992 book Accounting for Growth terminally irritated his then employer UBS Philips & Drew, received some calls from Gordon Brown's office, but they weren't followed up. "I'd like to help whoever I think is doing the right thing," says Smith, who is politically neutral. "Without being unkind, I think Alistair Darling's utterances on the City are incredibly naive. Some of the stuff I got [in my book] would have been a huge stick to beat people with."
Labour has lacked a dialogue with more neutral figures and those prepared to argue with them or play devil's advocate. "Off the record, they're bloody useless at it," says a Labour-supporting industrialist. "They waste their time listening to millionaire socialists from Hampstead, they're too deferential in their approach to the CBI and too apprehensive about financial London. The LFIG are dull and unimaginative - hardly freethinkers."
As the shadow cabinet and its machinery get closer to an election and the scent of victory, rivalries are emerging, confides an MP near to the action. Would-be ministers are mapping out their careers, already keen to put their stamp on this or that policy, sometimes to the detriment of better teamwork. In the offices at 7 Millbank, a stone's throw from the Palace of Westminster, there is an almost tangible hunger for power after 17 years in the wilderness.
For some observers this is reassuring. They would like to see some stronger personalities emerge from Blair's dream team, which under present heavily managed conditions come across as a bunch of Blair clones.
The danger is that debate on policy issues will be as limited among pre-election Labourites as it is among the lame-duck Tories. Roger Berry, Labour MP for Kingswood, claims this isn't so. In November he published a Fabian Society tract called Against a Single Currency, while his colleague Keith Hill wrote a second Fabian pamphlet, For a Single Currency. Says Berry: "My pamphlet fits into Labour doctrine, so does Keith's. It's not a matter of principle, but whether the economic benefits outweigh the costs." Although there are Eurosceptics in the parliamentary Labour Party, "there's a clear overwhelming majority who are for Europe", says Berry. Mark Hendrick, a Labour member of the European parliament, contrasts this relaxed situation - "We have cracks" - with that of the Conservative party - "they have fault-lines". Since Labour's leading Eurosceptic, Bryan Gould, left for an academic post in New Zealand, the danger of a party split on Europe has receded, says a Labour supporter in the City.
But New Labour's ability to unite its party on such issues as a sensible level for a minimum wage (to which it is committed), the application of the Maastricht Treaty's social chapter, corporate and personal taxation, and a policy on monopolies and mergers, will be the test of its friendly overtures to business. The mergers and acquisitions fraternity are taking no chances and are getting in the big deals before a change of regime. "In this sense the threat of a Labour government has helped the market," says an investment banker.
City analysts fear that the bigger Labour's majority in the House of Commons, the more difficulty Blair will have in containing the left wing of his party. "We'd be more comfortable with a 20 or 30 majority," says Philip Isherwood, UK strategist at Kleinwort Benson. "With a large one of say 100, the paybacks would start."
Blair's colleagues insist he is looking beyond a single victory to two or three five-year terms in office. There is no rush to secure fair-weather votes and no promise to change things from day one. For the financial sector, Labour's plans are still fluid. And this coincides with a rethink worldwide about the function of markets, the effectiveness of various financial models - such as the German and the Japanese - and the best principles of corporate governance.
Recasting market philosophy
This is a reaction to the apparent failure of free-market economics to maintain growth, employment and reinvestment at satisfactory levels through the business cycle. Intervention by government or government agencies is out of fashion across all major western political parties, but not only socialists are looking for a change in the way business is financed. This may not be a question of legislation. Too little is known about the effect of volatility and short-termism on the fortunes of corporations. The longer-term German and Japanese house-bank models, championed in the past, have recently taken a battering.
Labour, having discarded the baggage of Clause Four and much of the trade unionist clap-trap of the last generation, is in a position to recast its philosophy of markets from the basic elements - saving habits, views of return on capital, regulation, market practice and long-term concerns such as acceptable levels of employment, taxation, investment, education and growth.
Blair in January drew attention to his concept of a stakeholder society. It seems this was little more than a signpost, deliberately pointing several ways, neither rejecting free markets - and the concept of maximizing shareholder value - nor wholly embracing them. "I think it's an attitude of mind, rather than a set of policies," says Richard Faulkner of lobbyists Westminster Communications. "Tony [Blair] means giving people opportunities," says a shadow cabinet adviser, "not red tape or legislation." Bob Bischof, German-born chairman of UK moving-equipment maker Boss Group sees virtue in a model based more on codetermination and a close relationship with banks - one of his first moves, after taking over the British firm, was to sack his clearing bank (because of its attitude to a company faced with insolvency) and sign up with three German banks. "The stakeholder model has served Germany very well," says Bischof. "But every system degenerates. With Teutonic efficiency the red tape has started to surround the model. Nevertheless it's the right one for the 21st century."
Others don't feel so comfortable about implications of the stakeholder concept. "The term is either meaningless or dangerous," says Tim Melville-Ross, director-general of the Institute of Directors. "If it means doing no more than the best-run companies do already, that's fine. If it means legislation, and that companies are obliged to be accountable to many interests, then it's bad news. The joint-stock company is a clear and sharp way of running an organization."
Labour is reluctant to commit itself while the debate on corporate governance and short-termism is so hot and various studies are still in progress. Some have already appeared: an LFIG study on corporate governance completed last October; a paper by the Confederation of British Industry on short-termism; a campaign by the Royal Society of Arts, Tomorrow's Company, on what the best of British companies should aim for. The IPPR is about to publish the results of a commission on public policy and British business. It recently released some of the papers, on short-termism, insider-dealing and the like, submitted to the commission by economists and leading businessmen. Most of all, Labour is waiting for the findings of the committee on corporate governance chaired by ICI chairman Sir Ronald Hampel - successor to the Cadbury committee and likewise sponsored by the London Stock Exchange and the accountancy profession - which is due to report by the end of 1997.
It seems that Labour might ride into office on a wave of new economic fashion, just as Margaret Thatcher and the Conservatives coincided with a fashion for hard-nosed Chicago School economics. New Labour's would be a more soft-nosed, European style, with an emphasis on wider employment - without which neither Labour, nor perhaps any other government, will commit to European economic and monetary union.
And in the next few months Labour will be forced to spell out more than just generalizations on policy. Cynics believe it will then show itself in something closer to its true colours.
But Bischof of Boss puts the Labour phenomenon in a European perspective: "Labour now shows an amazing willingness to work," he says. "They've changed practically beyond recognition. In England, everything tends to become a political football.
"In Germany, new things and fundamental things are always carried by all parties. Moreover, the social-market economy was invented by the [right-of-centre] Christian Democratic Union - they're just to the left of Labour.
"That's why I don't have any problem talking to people in Labour about business and economics." n
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