Without Blair, Labour will always struggle to get on with business
The Labour Party conference starts today, and lord help us, Labour’s claim to be the UK’S government in waiting is beginning to have an awful inevitability about it. Labour benefited last time around from an angry, Remain protest vote, which is unlikely to be repeated in quite the same way at the next election. However disillusioned with the status quo we might be, it’s hard to believe there can be any kind of a natural majority for the hard Left agenda articulated in Labour’s last manifesto.
All the same, the party is plainly on a roll under its unlikely Marxist leader, Jeremy Corbyn, with the most recent poll giving it a four-point lead over the Tories. The last Labour Party conference was virtually bereft of any business presence, but we are told that the lobbyists are lining up to participate this time around. Business is being forced to treat Corbyn and his team seriously.
Even the hottest headed of firebrands tend to moderate when faced by the compromises of government. Principle and political idealism become subsumed by grim reality. Newcomers tend to grow up fast. But perhaps it’s unwise to rely on it in Mr Corbyn’s case. Taxpayer funded university tuition fees, renationalisation of the major utilities, higher taxes on top earners, new taxes on wealth, new taxes on property and so on – these are flagship policies that won’t easily be surrendered. Fleshing out some of the detail, Labour has said that shareholders in businesses arbitrarily judged to have failed the public will not get full compensation in the threatened round of nationalisations. A smash-and-grab future awaits.
Launching London Tech Week a couple of months back, Sadiq Khan, the capital’s Labour mayor, said it filled him “with pride to see our tech sector thriving”, and he planned to make the capital into “the world’s leading smart city”. He has a funny way of showing it. Kick-starting his campaign, Khan’s Transport for London has determined to ban Uber from our streets. I’m assuming he won’t succeed in taking us back to a world of queuing at the ATM so as to have sufficient physical cash to stand in the rain awaiting the unlikely prospect of a black cab with its light turned on. Even so, the intent is obvious. When it comes to the interface between business and politics, accommodation is generally the sensible approach. But faced by Corbyn’s New Model Army, it may be better to stand and fight.
Doing the right thing
Can financial markets ever be made entirely honest? This might seem unlikely, given that more than two hundred years of legislating against market abuse has so far failed to stamp it out. In its latest annual report, the Financial Markets Standards Board (FMSB) lists an astonishing 27 different categories of misconduct, ranging from straight insider dealing to wash trading, spoofing, cornering, window dressing and warehousing. Some of these have remained amazingly persistent, as evidenced by the recent Libor and foreign exchange scandals. The FMSB, established in the wake of the Libor debacle under the chairmanship of Mark Yallop, a City veteran who began his career at Morgan Grenfell, has set itself the ambitious task of correcting the mischief through self-help. Wholesale markets are in essence being given the opportunity to fix their own problem. They have a powerful incentive to do so, and not just because of the need to re-establish public trust; in the past five years, banks globally have paid some $375bn (£277bn) in conduct fines, about 80pc of which related to wholesale markets.
If that money had been retained as capital, Mr Yallop points out, it would have supported some $5 trillion of bank lending to the global economy.
For some, self-regulation will never be a satisfactory, or effective, substitute for the legislative variety. Yet the fact is that statutory regulation rarely works in driving better standards of behaviour in markets; practitioners must do that for themselves. London’s reputation for probity was shattered by the financial crisis. Anything that helps restore it is worth supporting.
Death of leverage
Toys R Us has gone bust not because of Amazon, but because it was loaded up with debt. This is the primary lesson to draw from the latest casualty of the global retail shake-out. Caught between the exponential growth of online retailing on the one hand and “big box” retailers such as Walmart on the other, things have admittedly become intensely difficult for traditional, bricks-and-mortar specialist retailers such as Toys R Us.
Yet no business can survive by standing still; Toys R Us simply failed to adapt quickly enough to changing times. The company’s private equity owners – KKR, Bain and Vornado – would no doubt deny that this was the result of their own mismanagement, or indeed the $5bn of debt they originally used to help finance the takeover, but when in a hole it sure doesn’t help to be paying out $250m a year in debt servicing costs, or for management to be spending half its time worrying about how to refinance the debt when it falls due.
The Toys R Us debacle may therefore amount to more than just the death of another company. It may also presage the end of the highly leveraged takeover, a financial model that once seemed to virtually guarantee its cleverer sponsors big paybacks. The trick was essentially to buy the company with its own money, sweat the assets to service and payoff the debt, then pocket the change. The tax advantages of debt over equity made the whole process doubly more lucrative. The private equiteer won; the taxman lost.
What the downfall of Toys R Us demonstrates is that established businesses are wasting assets, particularly in an age of very rapid technological and industrial change. In such an environment, almost any company left to stagnate while it pays off its capital is likely to fail. Up against the likes of Amazon, with no debt and no pressure from its shareholders to pay dividends, it won’t stand a chance. In any case, the once spectacular returns of leveraged takeovers may be largely a thing of the past.
‘The last Labour conference was virtually bereft of any business presence, but the lobbyists are lining up this time around’
There are ominous signs that Jeremy Corbyn’s Labour could form the next government, and business is being forced to treat him seriously