We heard on Tuesday that Labour wants to target ‘bad’companies and reward ‘good’ companies. What it should do it target ‘bad’ indicators of performance—which companies react to and cause them to become ‘bad’. Increasingly so. For years now—leading to the crisis— it has been short-term financial indicators of performance, rather than long-term industrial ones, that have overwhelmed company incentives. Concerned mainly with boosting their stock prices, they have, for example, preferred to spend retained earnings on buying back their shares (an increasing trend since 2003 with a sharp rise just before the crisis), rather than spend on long run growth enhancing R&D.
Also, credit ratings, so crucial to both companies and countries, have been poorly related to industrial indicators of performance such as productivity. In fact, in some cases, as we find in an EC FP7 funded project on finance, innovation and growth which I direct, they have been negatively correlated. And the venture capital (VC) market itself has been more concerned with earning a buck from the initial public offering of a company (IPO) than from any real value (e.g. product) produced by the companies in which they invest. This has generated a plethora of PLIPOs (product-less IPOs) in biotech and other VC intensive industries where since all the gains of VC come from the IPO –the story stops there (‘take the money and run’).
No value, no jobs. If Labour wants to generate ‘good’ companies it must create the right incentives. As I argue in my newly released book published by DEMOS The Entrepreneurial State, a first move might be to un-do one of Labour’s own ‘bad’ policies in 2002 which saw the time that private equity investment must be held before the gains from sale can be exempt from capital gains tax, to be lowered from 10 years to 2 years. Bringing this back up to at least 5 years will be a good start to create the incentives for companies to become ‘good’ by investing in the long-run. This might help prevent the ‘take the money and run’ dynamics in green-tech, which will hopefully become the next technological revolution (which the shadow BIS minister Chi Onwurah and I argued for yesterday at a Green Alliance fringe event at the Labour Conference).
The short-termism of financial markets is especially problematic in contexts in which radical technological change is needed and the reason why venture capital and other forms of private equity are not playing a leading role in green technology.
And why the State is needed more than ever. If, however, long run indicators of performance are resurrected (productivity, innovativeness), allowing good companies to be rewarded, then it might just be that the Tory dream of less State has more justification. But until the private sector shows it is willing to step up and invest in the long-run, this cannot be done. Ironically, for the sake of capitalism itself.