This is the third in a series of pieces exploring what the Labour Centre might offer to the electorate. The first, sketching out some of the broader ideas, can be seen here. The second, which advances some specific policies to reshape the labour market to support self-employment and improve competition, can be seen here.
I will come back to those ideas. But I want now to set out some thoughts on how the party might respond to public demand for better business.
We are awash with narratives of bad business: of environmental destruction, tax dodging, exploitative labour practices, unpunished regulatory breaches. And even as the events of 2008 disappear into history their effects remain political centre stage. Writing here I described the need to reforge the relationship between society and business as ‘the defining political question of our time’ and ‘perhaps the one great opportunity open to the Left.’
We’re not short of diagnosis. But we need to move to specific prescription. Not a command and control prescription that positions Labour at war with the forces of capital. But one that looks for inflection points and uses them to influence the shape that markets take.
Do you own an Apple iPhone? Or search with Google? Or drink at Starbucks? Or run in Nike?
What responsibility do you have for their environmental damage, poor supply chain management or abusive tax practices?
When you choose their products do you own their policies?
Their commercial performance suggests not. Decry the behaviour though we might, we do not deny them our custom.
What if you own their shares?
By investing, you lower their cost of capital. You reward their management’s assessment of the ‘right’ balance of profit maximising/cost externalising.
Still not convinced? But what if you ran those companies?
What if it were you who, as the Archbishop of Canterbury put it, turned a blind eye to your wild lending, knowing that Government stood back-stop; or who targeted an effective tax rate that compelled abusive tax behaviour; or who chose a supplier on the basis of cost alone, ignoring how they achieved it; or who opted for cheaper, unsustainable energy?
And what if you were only doing what your shareholders were rewarding you for?
If you spread responsibility widely enough no one need bear it. But it’s the law that has done this and what it has shared out it can gather together again.
Once upon a time ‘who bears responsibility’ was not a question we had to answer.
Until the mid-19th century we did not have limited companies, not as we now know them. The creation of a ‘legal’ person, separate from its owners, was a rare act effected almost exclusively by Royal Charter.
So there was always a man to carry the can. The owner, in law, was the business. There was no separate legal entity. He ran the company and the staff he employed executed his will.
But today we have two actors. And there are important consequences. Consequences that troubled commentators in the mid-19th century – but that we seem to have forgotten today.
Moral responsibility is difficult to site.
And criminal responsibility, too, is lost.
Speaking on the Marr Show on 24 January 2016, Rona Fairhead, a Director of HSBC at the time its Swiss unit facilitated tax evasion, said this:
‘What happened in HSBC, behaviour that was criminal, behaviour that was against the practices of the bank, we have said as a bank that we accept responsibility and we have said that we are deeply sorry for any reputational damage in what happened.’
Yet no criminal charges have been brought against the bank – or against Fairhead who chaired the audit committee at the time. And, remarkably, no regulatory action has been taken either – against HSBC or, as far as I am aware, Fairhead. It is difficult to imagine that an individual – as opposed to a company – who admitted criminal behaviour on this scale would escape sanction.
The intense political focus on my own field, taxation, has driven some interesting thinking.
Writing in June last year I argued for ‘measures – likely outside the tax code – which nudge business to become better fiscal citizens through embracing transparency and improving corporate governance.’ Would behaviour change if there was an individual whose reputation was on the line? Or if business was compelled to state publicly whether it would adhere to prescribed baseline standards?
Last summer government published a consultation document entitled ‘Improving Large Business Tax Compliance’ which asked whether responsibility for tax strategy should rest with a named individual. It also asked whether businesses should be invited to state whether they might sign up to a voluntary code of good tax conduct (similar to that applying to banks).
But business respondents were overwhelmingly hostile to these proposals. And the Conservatives abandoned them.
A perception that a lack of personal accountability for poor behaviour could engender a corporate tolerance of it drove policy thinking in other areas too.
In July 2014, the Bank of England published ‘Strengthening accountability in banking: a new regulatory framework for individuals’ which identified as a contributing cause to the financial crisis the fact that ‘individual accountability was often unclear or confused.’ That framework went on to observe that: ‘Both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (the regulators) believe that holding individuals to account is a key component of effective regulation.’
Companies cannot carry the can. This should not encourage in those who run them any diminution in the care with which they attend to the moral and legal mores society sets down. But history tells us it does.
Companies are creations of law. Through our laws we make them, and through those same laws we regulate their uses. There is no need for companies to become a means for the doing of that which a natural person could not. The privilege of limited liability and separate personality is ours to grant. And there is nothing radical in the notion that we should carefully and in our collective interests dictate the terms upon which that privilege is extended.
The law is not a mechanism for regulating morality. As I observed here (writing about the relationship between tax law and morality):
Discrimination on the grounds of ‘colour’ (to use the language of the Act) did not become immoral only on 8 December 1965 when the first Race Relations Actreceived Royal Assent.
I start with that truism because it is only if we lose sight of it that we can regard the question ‘Does XCo wrongly avoid tax?’ as properly addressed by the response ‘XCo complies with all relevant tax laws in all the jurisdictions in which it operates’. It is only if one loses sight of it, too, that one can conclude… that there is no use to which morality can be put.
The law of corporate personality need not be used to allow to mask moral responsibility.
We should identify the spheres of corporate behaviour which we consider contain a moral element – environmental standards, a tax strategy, labour standards and others – and ask large companies to publish their policy on it and name the individual responsible for achieving that policy. By taking that step we re-establish clear moral linkage between action and actor.
And separate corporate personality should never act as a shield against criminal responsibility.
If we care enough to attach criminal sanction to types of behaviour we should impose upon directors a positive obligation to take reasonable steps to secure that such behaviour does not occur. The converse – that they need not take reasonable steps to prevent criminality – invites directors to regard that behaviour less seriously than society by deeming it criminal dictates.
Let the law join together what it split asunder.
Jolyon Maugham QC (pictured) is a barrister practising from Devereux Chambers and has advised the Labour Party on its reform to the non-dom rules. He blogs at Waiting for Godot – Musings on Tax and can be found tweeting here.
