Change the law on limited liability to control boardroom greed

Boardroom greed: how to bring an errant multinational to heel

Changing the law on limited liability is the nuclear option, but it could force errant firms to repent

• 
• • Larry Elliott
  • The Guardian, Friday 12 December 2014

'The banks, the ­multinational tech companies and the giants of the energy sector are even more powerful than the unions were four decades ago.' Photograph: Matthew Lloyd/Getty Images

Roll the clock back 36 years. It is December 1978 and the so-called winter of discontent is in its early stages. Over the next couple of months the papers will be full of stories about rubbish piling up in the streets and of cancer patients failing to receive treatment. Britain is gripped by widespread industrial action, but public support for strikes is crumbling.

A few months later, in May 1979, a new government arrives in power. Despite failed attempts in the recent past, it decides that something must be done to curb the power of organised labour. Self-regulation has failed, the administration of Margaret Thatcher decides. It is time to use the power of the state to end abuses.

Bit by bit over the next decade the trade unions are systematically weakened. When it comes to the crunch they are not nearly as powerful as they think they are.

So what is the difference between the trade unions in the 1970s and the big corporations today? If anything, the banks, the multinational tech companies and the giants of the energy sector are even more powerful than the unions were four decades ago. And like the unions of yesteryear, business has had opportunities to put its own house in order – and spurned them. For the union general secretary telling Harold Wilson or Jim Callaghan what his members will and will not wear, read the chief executive thumbing his nose at David Cameron or George Osborne.

Meanwhile, the list of corporate scandals is getting longer. We’ve had horsemeat passed off as beef; the rigging of the foreign exchange market; the mis-selling of payment protection insurance; aggressive tax avoidance through webs of offshore shell companies; sweetheart deals between multinationals and Luxembourg. Only yesterday, the Financial Conduct Authority said some pension companies were screwing pensioners by failing to provide them with the best deals on offer.

Meanwhile, the Federation of Small Businesses said a fifth of its member companies had been subject to the bullying demands of big corporations, with many pushed to breaking pointas a result.

Make no mistake, the scandals are damaging. After a parliament marked by times of austerity and falling living standards, trust in executives to do anything but look after their own selfish interests is at a low ebb. Energy companies and banks are as popular with the public as the trade unions were during the winter of discontent. A government that decided to curb corporate power would not lack support from the voters. Osborne’s “Google tax” on the diverted profits of multinationals was the single most popular policy in last week’s autumn statement.

There are, though, differences between now and 1979. One is that the big multinational companies are more powerful than the trade unions were. Another is that Thatcher had a clear idea about what she wanted, whereas today there is no real blueprint for reform.

All this week the Guardian has been trying to fill that vacuum. Our series on taming corporate power is designed to explode the myth that there is nothing that could be done to affect boardroom behaviour. It’s not the ideas that are lacking, it’s the political will to persevere with a process that will be long and difficult.

Step number one should be to use the existing powers of the state, which even in this era of globalisation and footloose capital are considerable. Ministers can break up monopolies, insist that the investment arms of banks are severed from their retail operations and force companies to pay a living wage when they receive public contracts. They should use these powers and add to them. Pharmaceutical companies have to prove that any new drugs they market will not harm the public; the same test should be applied to new products developed by the financial sector.

Step number two involves redressing the imbalance of power between capital and labour. Those troubled by the growing gap between rich and poor, or by the relentless squeeze on wages since the recession, need look no further for an explanation than the decline in trade union power. Evidence shows that those workers still covered by collective agreements earn higher wages, so one possible reform would be to set up new tripartite bodies for wage bargaining in certain sectors, such as contract cleaning.

A future Labour government could also do worse than to dust down the Bullock report from 1977, which called for greater employee participation in the running of companies, for the need to build trust within organisations and for the desirability of Britain learning from the industrial models of other European countries, Germany in particular. This might be done voluntarily, with companies offered the incentive of lower corporation tax for each worker representative on the board, or by statute.

Lower corporation tax is, of course, hardly an incentive for those companies that are paying virtually no corporation tax in the first place. Osborne is rightly frustrated that some multinationals do billions of pounds of business in the UK but still declare nugatory profits, despite the steady reduction in corporation tax. So, step number three involves ensuring that companies pay what is due. The key here is for governments to insist on country-by-country reporting by the Googles and Amazons of this world, because this would ensure that all multinationals would have to declare the countries in which they operated, what the company is called in each location, its financial performance in each country it does business (including inter-company trade), and how much tax it pays to each government. Companies would have to abide by an international financial reporting standard and provide information for all tax jurisdictions. Shining a light on the murkier activities of multinational companies is vital.

Finally, there’s the nuclear option: stripping companies of the protection provided by limited liability. The owners, the shareholders and those running companies wield enormous power but don’t bear full responsibility for their actions because their liability is limited to the size of their investment in a company or partnership. But limited liability is a privilege not a right, and in return for granting it society should get something back in return. The argument the Thatcher government used when it said employers could sue unions for damages caused by strikes was that there was no such thing as a something-for-nothing world, and the same argument applies to companies.

The deal should be that companies get the protection limited liability provides in return for looking after all their stakeholders: the workers they employ, the customers they serve, the companies that form their supply chains, the taxpayers who pay for the transport infrastructure and the education system that businesses require. The deal should not be limited liability in return for boardroom greed, running rings round the taxman and breaking the law.

As Prem Sikka said in this series, any change to limited liability would be fiercely resisted. But even the suggestion of change would concentrate minds. Imagine, for example, that a future government set up a royal commission to look into the issue. Would this lead to companies treating their staff better and paying more tax? You bet it would.

Corporate power has turned Britain into a corrupt state

Westminster lobbying is the least of it. Revolving-door colonisation of public life is a corrosive threat to democracy

• 
• • Seumas Milne
  • The Guardian, Tuesday 4 June 2013 22.20 BST

'Hector Sants, head of the Financial Services Authority in charge of regulating banks until last year, who joined Barclays six months later. But he's only one of a stream of regulators who have made similar moves.' Photograph: Micha Theiner/City AM / Rex Features

If you're under attack, create a diversion. David Cameron and Nick Clegg have been floundering as the spectre of Westminster sleaze has returned to haunt them. Four years after the MPs' expenses scandal engulfed British politics, yet another alleged scam has been exposed. First a Tory MP and then a clutch of greedy peers were caught on camera apparently agreeing to take cash from journalists posing as representatives of foreign companies. "Make that £12,000 a month," grinned Jack Cunningham, Tony Blair's former "enforcer".

Cameron and Clegg had promised to deal with parliamentary influence-peddling, and done nothing about it. So on Monday they came up with a plan: to crack down on trade unions. Wrapped in a panic bill to set up a register of lobbyists are to be powers to police union membership lists and cut union spending in election campaigns. The first will make what is already the almost impossible task of holding a legally watertight strike ballot still harder. The second is a direct attack on Labour funding.

The contemptuous class cynicism of the coalition leaders' response takes some beating. Not only are unions the most accountable and only democratic part of the political funding system; but by including anti-union clauses in the new bill, Cameron and Clegg want to ensure Labour's opposition – all the better to change the subject and wrongfoot the opposition in the process.

Even Conservative MPs were embarrassed at the crude chicanery of it. Just as absurd is the fact that the register would have done nothing to prevent the latest lobbying scams – except help the puffed-up parliamentarians avoid getting stung in the first place. And the new law would apply only to lobbying firms, while directly employed corporate lobbyists would be exempt. Add to that the failure to bring elections to the House of Lords, and there will certainly be more jobs-for-life cronies cashing in with corporate clients in the years to come.

The truth is that parliamentary sleaze merchants are small fry in the corporate lobbying game. Before he became prime minister, Cameron predicted that secret corporate lobbying was "the next big scandal waiting to happen", adding: "We all know how it works." As a former lobbyist himself, he certainly did – and still does.

Cameron's own election adviser, the Australian Lynton Crosby, is a lobbyist – for tobacco, alcohol, oil and gas companies. Which is why the prime minister came under attack for dropping curbs on cigarette packaging and alcohol pricing. His party treasurer Peter Cruddas resigned after offering access to Cameron for a £250,000 party donation. His defence secretary, Liam Fox, resigned over his relationship with the lobbyist Adam Werritty.

But lobbying doesn't begin to cover the extent of corporate influence. More than ever the Tory party is in thrall to the City, with over half its income from bankers and hedge fund and private equity financiers. Peers who have made six-figure donations have been rewarded with government jobs.

But the real corruption that has eaten into the heart of British public life is the tightening corporate grip on government and public institutions – not just by lobbyists, but by the politicians, civil servants, bankers and corporate advisers who increasingly swap jobs, favours and insider information, and inevitably come to see their interests as mutual and interchangeable. The doors are no longer just revolving but spinning, and the people charged with protecting the public interest are bought and sold with barely a fig leaf of regulation.

Take David Hartnett, head of tax at HM Revenue & Customs until last year and the man whose "sweetheart deals" allowed Starbucks and Vodafone to avoid paying billions in tax. He now works for the giant City accountancy firm Deloitte, which works for Vodafone. The two-way traffic between the big four auditing firms and government is legendary: staff are sent on secondments to HMRC and the political parties and then return to devise new loopholes for corporate clients.

Then there's Hector Sants, head of the Financial Services Authority in charge of regulating banks until last year, who joined Barclays six months later. But he's only one of a stream of regulators who have made similar moves. The same goes for the 3,500 military officers and defence ministry officials who have taken up jobs in arms companies in the past 16 years – as it does for top civil servants and intelligence officials. The cabinet secretary, Jeremy Heywood, is the living embodiment of the revolving door, having moved effortlessly from the Treasury to Blair's office to the investment bank Morgan Stanley and back to work for Cameron.

That's before you get to the politicians. City directorships in opposition used to be a Tory preserve. But after New Labour embraced corporate power it became a cross-party affair. Blair is in a class of his own, of course, raking in £20m a year from banks and autocratic governments; but he is followed closely by dozens of New Labour ministers who moved out of government into lucrative corporate jobs, often for firms hustling for contracts from their former departments.

It defies rationality to believe that the prospect of far better paid jobs in the private sector doesn't influence the decisions of ministers and officials – or isn't used by corporations to shape policy. Who can seriously doubt that politicians were encouraged to champion light touch regulation before the crash by the lure and lobbying of the banks, as well as by an overweening ideology?

Privatisation has extended the web of lubricated relationships, as a mushrooming £80bn business uses jobs and cash to foist a policy that is less accountable, lowers standards and is routinely more expensive on the public realm. When 142 peers linked to companies involved in private healthcare were able to vote on last year's health bill that opened the way to sweeping outsourcing – and the City consultancy McKinsey helped draw it up – it's not hard to see why.

Britain is now an increasingly corrupt country at its highest levels – not in the sense of directly bribing officials, of course, and it's almost entirely legal. But our public life and democracy is now profoundly compromised by its colonisation. Corporate and financial power have merged into the state.

That vice can be broken, but it demands radical change: closure of the revolving doors; a ban on ministers and civil servants working for regulated private companies; a halt to the corrosive tide of privatisation; and a downward squeeze on boardroom pay to reduce the corporate allure. It's going to need a democratic backlash.