Cable has capitulated to the City. It doesn’t have to be this way.

by Dan Cooke

What does Vince Cable have in common with Eric Pickles, Michael Gove and George Osborne? Oh, and Ed Miliband and Ed Balls too? Answer – they are all cursed by the iron law that their careers, like all political careers, will end in failure (or, at least, will be seen as a failure, whatever reasoned protestations to the contrary their future selves might make).

So, as renewed rumours have surfaced this weekend that Mr Cable is contemplating resignation when the independent commission on banking inevitably fails to deliver the radical restructuring he has called for, perhaps he should be sanguine about the harsh judgment that will, if he does so, be pronounced on his contribution to politics.

It is clear now that his resignation will be less a “nuclear” explosion for the coalition than the detonation of an ideological neutron bomb – devastating for his own influence, but leaving Tory and orange book values intact. Following the limp conclusion of “project Merlin”, maintenance of the status quo on bank structures would indeed be a sad anti-climax to the expectations fostered when Cable declared himself co-equal with the chancellor in banking policy.

It would represent a further blow to Cable’s reputation among former admirers after a miserable list of disappointments: his role in the tuition fee betrayal, the self-inflicted loss of responsibility for the Sky deal, the daily complaints that his department has no strategy for growth and its scrapping of regional development agencies (described by Mr Cable, as “Maoist and chaotic”, but allowed to pass all the same by this secretary of state).

Resignation might provide one last shot of momentary glory and a return to the easy life of responsibility-free punditry, in which Cable made his name. At the very least, in departing, he would surely at least be spared the humiliation of his acolyte, Lord Oakeshott, who was promptly briefed never to have held the position he was renouncing (an exercise reminiscent of the official removal of communist apparatchiks from photographs after their fall). With luck, benefitting from the British love of a good loser, a post-resignation Cable could attain the status of national treasure and may not have graced the Christmas TV schedules in his dancing shoes for the last time.

Yet if Mr Cable were to choose this moment to withdraw from the government, it would not primarily mark the commendable acknowledgement of past failings, but rather an unforgivable surrender of battles which still can be fought and won. Above all, it would show that Cable lacks both the political sense to see why he was doomed to lose on banking and the toughness to seize the chance to make other reforms just as lasting.

First of all, a radical settlement on the banks was never in prospect under this government. Cable is an economist who has worked in the City and, from a foundation of experience and knowledge, is intellectually prepared to question the convenient nostrums of the square mile and its reflex predictions of capital and human flight if unwanted changes are made. But both Cameron and Clegg are sons of stockbrokers who imbibed the City’s sense of its own virtue with their mothers’ milk, but never deigned to work in, or understand, the money-machine that paid for their privilege.

Osborne is a politician who doesn’t aspire to a subtle understanding of economics or finance, but believes he has the judgment to make the big calls that will determine the result of the next election. All of this trio, by background and temperament, are a soft touch for practised warnings by the “grown-ups” of the financial services industry that the slightest tinkering will lead to disaster. As a result, nothing that doesn’t pass the test of acceptability by the big banks will pass through this government.

But when Cable thrilled the faithful at his party conference in September with a bullish critique of corporate culture in the UK, the banks were only part of the story. Feeding on the widespread concern that British companies are soft targets for hijack and asset stripping by predators, Cable asked:

“Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors sometimes forget their wider duties when a cheque is waved before them”?

Echoing Lord Mandelson’s hints before the election that some “grit” must be thrown into the takeover system if the British track record of financial engineering over investment is to be tackled, Cable has since briefed that he could legislate to shift the balance in favour of management wishing to fend off opportunistic takeovers.

While Mandelson’s suggestion that the acceptance thresholds for takeovers might be reformed was smothered by the City’s takeover panel, Cable noted that this body is dominated by representatives of the professional advisers who benefit most from takeovers, and established a new consultation to which his department must respond by April. The consultation cites evidence that takeovers regularly destroy, rather than creating, value, lead to job losses and lower investment and queries whether the vulnerability of British companies to bids fosters a short-termist management culture.

These are searching questions crying out for real answers and, contrary to the smooth gloss put on the status quo by the takeover panel, real and viable alternatives exist. After all, US corporations are notoriously free to adopt anti-takeover defences without this prejudicing their ability to access international capital, and across the EU, according to the Commission’s report on implementation of the takeover directive, the majority of countries retain a far less liberal framework than the UK.

A starting point of reform must be to require bidders for UK companies to have the approval of their own shareholders before committing to an offer (as UK companies themselves are required to do when making a bid). As Kraft took over Cadbury in the teeth of resistance from its ultimate owners, is it any surprise that promises made at the time have not been kept since?

Second, to prevent management’s heads being turned by quick bucks, the practice that their share options automatically vest on a takeover – potentially years before they otherwise would – needs to end. Management who sell should be required to roll over their investment into the acquirer’s equity on their existing terms or have cash proceeds placed in escrow. And, as this alone is not enough to address the risk of conflicts of interest, the holdings of management should be disregarded in calculating whether the approval threshold for the deal has been met.

Most importantly of all, while there will always be a free market in listed shares subject to a bid, those who have acquired shares after the announcement should also be disregarded for the purpose of meeting the bid’s approval threshold. Hedge funds should be free to gamble on the outcome of the bid but should not be able to simultaneously shape that outcome, particularly when they have often merely “borrowed” shares for this purpose pursuant to repo arrangements.

These reforms would shift the emphasis in management of our listed companies at least a little in the direction of shareholder value through long-term investment rather than quarterly touting for a quick buck. Would they be stalled by the neo-liberal wing of the coalition as firmly as reform of the banks has been? Unlikely if Cable can find it within himself to champion them as a radical counterweight to disappointment elsewhere. Takeover regulation is barely on the radar of the detail-averse, professional politicos who dominate the coalition (the only senior Tory who has recently spoken out in defence of the current framework is Ken Clarke, which says it all).  And there’s no vocal interest group opposing them or compelling narrative of threatened brain-drain if they go ahead.

The message for Cable – while there still remain any who still believe in him – is that if he bucks up now, he can still land this one. Now isn’t the time to take away his ball; it’s time to run with it hard. If he does so, he met yet be remembered for more than just Strictly Come Dancing.

Dan Cooke is a Labour activist and lawyer.

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4 Responses to “Cable has capitulated to the City. It doesn’t have to be this way.”

  1. Dan – Really interesting and enlightening piece. Thank you, Jonathan

  2. william says:

    A share in a public or private company is the business between the shareholder and its directors,not the government.Would Mr. Cooke like restrictions, rules and the like on his buying or selling where he lives?BTW, Cable worked for Shell, which to a lawyer is called an ‘oil company’.

  3. Edward Carlsson Browne says:

    Good article.

    William, a home is a private good. A publicly listed company with billions in assets is going to have an impact on society as a whole and therefore is to some extent a public good. It is reasonable that society makes sure that the company is not being run in a way hostile to its interests. Which is, now I come to think of it, much like the way the council would be entitled to compulsorily purchase my property if I left it to crumble and be a blight on the area and refused all instructions to rectify this.

  4. Dan Cooke says:

    Thanks, Jonathan.

    William, you are welcome to take that view but it would imply we should abolish the current Takeover Code which sets limits on the conduct of bids, prescribes a minimum acceptance threshold and already excludes certain categories of shareholder from consideration as to whether the threshold is met. I simply propose shifting the balance a little.

    Personally I would consider working in the corporate head office of a listed company as being in “the City” but I guess it’s not a precise term.

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