Britain's Anti-Business Culture Hits Investors

Published in Investing on 8 February 2012

It can spell trouble for investors when politics mixes with business.

Is British society "anti-business"? Recent events make me think that it is. Hardly a day goes by without some politician attacking the business community, while the civil service continues to deliberately pile on the red tape, which makes it more expensive to operate in this country.

This concern was raised last Monday by a group of chief executive officers (CEOs) from companies as diverse as BAE Systems (LSE: BA), Burberry Group (LSE: BRBY), Centrica (LSE: CNA), Next (LSE: NXT), Sainsbury (LSE: SBRY) and WPP (LSE: WPP) when they met with the Prime Minister.

Even though the PM said that Britain was not anti-business, as the old saying goes "actions speak louder than words." While the coalition hasn't called businesses "predators", unlike the leader of the opposition, its much touted bonfire of anti-business and job-destroying regulations has turned out to be a damp squib.

Why it's a big problem

Ultimately, political attacks on business reduce investors' returns, and it's not just because of the misguided policies that they produce. The hostile climate that is created will cause some directors to run their businesses in a way that avoids attracting the attention of the political and media classes, lest they risk finding a pitchfork-wielding mob at their gates.

So if a factory is losing money and needs to be shut down, the chance that they could be vilified for doing so will encourage some directors to take the politically easy route and keep it open. This would most definitely harm their shareholders' interests.

Voters aren't rational

The economist Bryan Caplan, an expert on public choice theory, showed in The Myth of the Rational Voter that many voters are highly irrational and very badly informed when it comes to economic matters.

In particular, these voters (all parties have them) disapprove of free markets, international trade and new technology despite all of the evidence that shows how these things improve their living standards.

Consequently, they favour economic policies that damage their own interests and those of the wider economy. Since politicians' stock in trade is attracting votes, they are encouraged to pander to these irrational biases, and the result is that we end up with policies that attack business and weaken the economy.

No thanks, I'll invest somewhere else

Let's say that you're the CEO of a multinational conglomerate. You've been thinking of building a new factory in a foreign country, but in the last few weeks its political and media classes have started attacking the business community.

On the table are proposals to restrict profits, while business leaders are now being vilified in the media and a few have seen their contracts torn up by the state in an attempt to pander to the mob.

Would this country still be top of your list?

You can bet your proverbial bottom dollar that the recent spate of attacks on the Royal Bank of Scotland (LSE: RBS), concerning the bonus of just under £1 million that was owed to its CEO Stephen Hester, have been noticed by the international business community.

Higher tax rate, less tax is raised

At last October's annual general meeting of Diageo (LSE: DGE), its CEO Paul Walsh remarked that the increase in the top rate of income tax to 50% had made it harder for him to run the business. That's because some senior executives in Diageo's overseas operations were not prepared to move to the UK because the higher taxes would cut their standard of living.

The 50% tax rate is particularly popular among people who believe that it brings in more money. However, the jury is out as to whether more or less taxes are being raised by the higher rate, because of the strong incentive that it creates for people to avoid taxes and/or work fewer hours, and it appears that it is actually damaging the economy.

Furthermore, it sends out a big signal to the international business community that it would be prudent to consider other countries with more favourable policies and lower tax rates.

What can we investors do?

While most of us who live and work in Britain can't easily up sticks and emigrate, when it comes to our money it's a different matter altogether.

A few minutes of your time is enough to sell shares in a British-focused company and reinvest the proceeds in a British-based multinational that does very little business in the UK or in a foreign domiciled-company with no British interests.

During the last decade I've increasingly chosen to diversify away from the UK, and now some 75% of my portfolio consists of foreign companies and UK-based multinationals whose businesses are dominated by their overseas interests. Given the current political climate, I expect this proportion to continue to increase.

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> Tony owns shares in Diageo and Sainsbury.

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goodlifer 08 Feb 2012 , 9:30am

"The economist Bryan Caplan...showed ... that many voters are highly irrational and very badly informed when it comes to economic matters."

How very different from the average investor!

SteveKzz 08 Feb 2012 , 10:06am

... and not that different to the average economist.

tux222 08 Feb 2012 , 10:35am

As I see it the problem is bureaucrats masquerading as entrepreneurs - and getting away with fat salaries and bonuses whether they succeed or fail, and often with huge golden parachutes should they do so badly that they lose their job.

Here's an idea. Make employment contracts with a salary in excess of (say) £200,000 legally unenforcible. If the fat-salaried people turn out to be useless, fire them or cut their pay with no comeback. Anyone genuinely worth that much (or much more) really doesn't need security of employment or a golden parachute. He can save more in one year than some people earn in ten, and if he really is good there will be a queue of people waiting to recruit him.

If he knows he's not really that good ... a fat-cat bureaucrat will probably prefer to request a salary cut to £200,000 to keep his security of employment. I'd give him the legal right to do that during a transition period.

duffmanchon 08 Feb 2012 , 9:38pm

call their bluff! Investors in the uk know that they investing somewhere with strong institutions and the rule of law (unlike say Russia or China) certain accounting standards (note how even Anthony Bolton got screwed in China), weak employment regulations (3rd worst in the OECD, Tories won't agree but compare us to Italy or France where you have a job for life) the list goes on... that certainty is worth paying a premium for, like investing in coca cola or until ever. The hot money from abroad keeps the pound artificially strong making our exports uncompetitive and foreign owners are unlikely to ever vote against fat cat pay, we would be better off without it.

couldnotmakeitup 09 Feb 2012 , 5:54pm

On this one I am with tux222 and duffmanchon. Usually I find Toni Locket's articles educational and informative not this time though!
Observation: how come a lot of businesses come here, some pretty dodgy!
How come our utilities are huge profitable, where is the competition?
Doesn't look to me a difficult business environment! Since the big bang banking and finance have been very lightly regulated! How come these uniquelly gifted executives in banking (whose extraordinary pay/bonuses seems to be unrelated to performance) have made such a hash of things and where were the regulators? Does'nt look to me like onerous supervision! Lastly, if you want to see how out of sinch executive pay in the banking sector is compare it with executive pay in manufacturing and other industries. That will tell you all you need to know and where is our reward? As investors we are taking all the risks!

TonyTwoTimes 10 Feb 2012 , 7:37am

Hi couldnotmakeitup and others,

A lot of extremely dodgy businesses have come here, mostly from the former Soviet Union, because our regulators are very lax about letting them list on the stock market.

Many companies come here because we've a more flexible labour market than most of the other EU member countries. So if things don't work out it's a lot cheaper to extricate themselves.

This is an advantage, particularly for people who are looking for work and a government who's desperate for more taxation, though it's not seen as such by most of the population who think that extra employment regulations impose no costs (e.g. they always forget the people who are priced out of work by new regulations).

Many utilities are natural monopolies (e.g. water) where competition is not a realistic option.

The biggest problem is that because the banks made such a hash of things, aided by the regulators and politicians, it's now being seen as giving them carte blanche to attack all business.

A lot of people out there cannot distinguish between the banks and the City of London, many of them are in Parliament and are playing to the crowd.

E.g. the 50% tax rate, much hyped by our political and media classes and which is more like 70%+ once employers and employees NI is taken into account.

There's strong evidence that at this level the Laffer curve kicks in and cuts the overall tax take.

The claims that the Laffer curve doesn't work are false. That's because taxation revenue is by definition zero at 0% tax, abd will be zero at 100% tax.

So since a plot of tax £ vs. tax rate is a continuous curve at some % rate tax is maximised and increasing the tax rate beyond this point cuts the total tax raised :-)


Tony Luckett

Kapulski 10 Feb 2012 , 7:05pm

So the "recent spate of attacks" on RBS concerning Stephen Hester's bonus is "anti-business" is it? And this is bad because "attacks on business reduce investors' returns"?

Let's be clear. Over the past year, the RBS share price has not only underperformed the market, but also two of its three high street competitors - HSBC and Barclays. So on this metric it's Stephen Hester who has reduced investors' returns. No wonder the size of his bonus has been widely questioned.

AlysonThomson 11 Feb 2012 , 2:16am

Objecting to the obscenely high bonuses which Investment Bankers have been awarding themselves with for failure in th epast - what? - 15/20 years? is not "Anti-business".

TonyTwoTimes 11 Feb 2012 , 10:24am

Hi Kapulski,

Hester's bonus wasn't tied to RBS' share price. It was based upon hitting certain targets, as per a bonus scheme which was approved by the previous government which hired him.

One of the biggest drags on RBS' share price is that the market knows that politicians will now meddle at every opportunity to be populist. That's what wiped about £1 billion off RBS' market value.

The anti-business claims aren't just about the bankers' bonuses. It's things like the constant denigration of success, the imposition of yet more red tape and the 50% tax rate which doesn't produce more money but was designed to appeal to the envious part of our society (the previous Chancellor has admitted this).

These things are noticed internationally, but then many people in Britain are happy about that as well because they think that inward foreign investment is bad for the economy!

The lesson of the 1980s, when cutting the tax rate from 60% to 40% produced more tax, is lost on many people who incorrectly assume that higher tax rates means more tax is raised.

Kapulski 14 Feb 2012 , 7:09pm

Hi TonyTwoTimes: Absolutely Hester's bonus was not tied to RBS share price. My point was that in the case of RBS - which you specifically mentioned - it wasn't "anti-business sentiment" which reduced investors' returns. It was Stephen Hester.

I'm also uncertain as to whether "red tape" is anti-business. In my experience, established businesses love red tape, because it acts as a barrier to entry for potential competitors. (It's certainly a disincentive to entrepreneurs, but that's a different point.)

Finally, the jury is still out on the 50% tax rate. The Laffer curve may or may not kick in, but we won't know until all those tax returns are filed, and I can't see how you can be so certain that it'll be counterproductive in the absence of any actual evidence. And I'm deeply dubious of any argument which suggests that executive management is a global business and that a 50% tax rate will drive UK management overseas. The US has long had far lower personal tax rates, but American senior management isn't exactly riddled with Brits...

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