It is nearly two years since construction group Carillion collapsed, and its failure in January 2018 has been followed by those of a string of other UK companies.
When a business like Patisserie Valerie, British Steel, Thomas Cook or Mothercare goes into insolvency, there is a heavy toll in terms of lost jobs and unfunded pensions. Customers and creditors are left out of pocket and the British taxpayer is frequently left to pick up the bill.
If we are to have a healthy economy, it is vital that we learn lessons from these failures. After the collapse of Carillion, the House of Commons’ Business, Energy and Industrial Strategy Select Committee, which I chaired, carried out an inquiry into the catastrophe.
We found the acquisition-driven business had built up colossal debts as it tried to outrun its problems. Its accounts misrepresented reality, while bonuses and dividends were paid out as though nothing was wrong.
Carillion was the architect of its own downfall. However, it is important to recognise that businesses do not operate in a vacuum, divorced from the rest of society, even if they sometimes act as though they do. They rely on state institutions including the education system to provide skilled labour, the health service, as well roads, railways and fibre optic networks to get their goods to market. Many also build growth and profits through government contracts.
Too often these businesses shirk their responsibilities by refusing to pay a proper living wage, while providing huge salaries and bonuses to those at the top. They lobby for tax cuts to boost profits but short-change their pension funds. They fail to pay suppliers on time but expect the government to ride to the rescue when things go wrong. That has to change. We need a new social contract with business.
In my time chairing the business committee, we repeatedly called on the government to make changes around audit, remuneration, pensions, bonuses and late payments to smaller businesses. Despite widespread support from both Tory and Labour MPs, these calls were ignored.
We need change to fix British business. As the parties prepare to publish their election manifestos, there is an opportunity to reshape how business works and focus on the responsibilities it has to society. If the corollary of inequality is political and economic instability, then business should realise that it too would benefit from a new settlement.
In 2017 and 2018, Jeff Fairburn, then chief executive of Persimmon was paid almost £85m — mostly due to the housebuilder’s bonus scheme, which was linked to a rising share price, driven upwards by the taxpayer-backed Help to Buy scheme. And, just a month before announcing an £845 million reduction in its profits, Carillion paid out dividends of £55m.
Our investigation of that dividend concluded that auditing — an industry which exists to validate and keep business honest — is compromised, partly by a lack of competition, but most of all by a network of business relationships, blurred incentives and light-touch regulation that deter proper scrutiny.
At the same time, the share of national income going to workers through wages has fallen and organised labour has been weakened, as the owners of capital have secured greater returns. Financial engineering and asset price inflation have come to serve as important motors of profit and gross domestic product growth.
As the Austrian economist Karl Polanyi argued, capitalism left to regulate itself will erode the conditions on which it depends for continuing prosperity. After the second world war, it was a Labour government which rebuilt Britain. Today, some of the challenges we face are different, but the same logic applies.
We need an overhaul of corporate governance. Labour’s proposal to put workers on corporate boards is an important first step to restoring a balance of interests within the boardroom. An agenda for encouraging co-operative, mutual, community and employee ownership models could also be key to a redistribution of power within the economy.
Then, there is the idea of “social licensing”, a proposal put forward by academics at the University of Manchester, which would see the UK government impose conditions on businesses when they are seeking something from government, such as planning permission or a government contract. These conditions might include contractual requirements to meet specific social, environmental or community objectives including paying staff a living wage, recognising labour unions, localising supply chains or opening up the ownership and governance of the company to workers and communities.
The Conservatives have called the December 12 election hoping it will be all about Brexit. I believe stopping a hard Brexit is essential if we want to avoid ever greater austerity and a further race to the bottom in wages and conditions.
But after a decade of stagnant living standards and rising inequality, this election needs to be about more than just leaving the EU. A radical reworking of our broken business model must be our first step to put us on course for a balanced economy that is fair, just and works for everyone.
The writer is seeking re-election as Labour MP for Leeds West
Get alerts on UK politics & policy when a new story is published