Sep 27, 2015

Why we need to keep our pillars of society standing

A highly regarded book — Why Nations Fail: The Origins of Power, Prosperity and Poverty — provides a simple insight. According to the authors, Daron Acemoglu and James Robinson, it is not weather or geography but a society’s economic and political institutions that make the difference between those countries that flourish and those that struggle.

I would argue that Britain is extremely successful as a nation overall — quite possibly because it is good at building institutions. It is surely one of the least corrupt nations on earth — which is a key reason why everyone seems to want to invest here. Last year we were recipients of the third-largest flow of foreign direct investment in the world, according to the Organisation for Economic Co-operation and Development, and easily the highest per capita.

But we live in changing times. Many institutions are not well suited to adapting to rapidly evolving technology or shifts in behaviour. The Labour party is the latest creaking non-profit body that may be facing an existential crisis. It might even split in the next year and cease to be one of the duopoly in what is, in effect, a two-party system. While this is not a perfect political model, it has proved a much more resilient form of democracy than the systems in many other places.

The underlying reason for Labour’s crisis is the failure of socialism to provide a viable alternative to markets and capitalism, while excessive welfare became unaffordable.

In trying to become more popular and up to date, Labour tried to widen its membership base, which permitted a de facto takeover by extreme elements — who now threaten to ruin its election chances. The party made a dramatic attempt to modernise itself — and in doing so may have paradoxically brought about its own destruction.

While membership and charitable structures don’t face the perils of private ownership, they can have their own problems. Just as human nature dictates that certain individuals in any society — entrepreneurs — will try to start companies and enrich themselves through the mechanism of profit, so others will prefer status, power and control. Those who seek leadership in the public and non-profit sector might argue that their motives are less venal than those in business. But at least ownership in the private sector can allow for decisive action and swift removal of managers. Unfortunately, non-profits are susceptible to what I call “insider capture” — the stealthy takeover of the organisation by executives who run it to suit their own ends, rather than pursuing its purpose of public good.

Many institutional-style companies in Britain also face testing times. BP, HSBC, Rolls-Royce and Glaxo Smith Kline, among others, have all suffered recent scandals that have cost them huge sums and damaged their reputations. They will survive, but they have all slumped down the Fortune 500 table of the world’s largest corporations.

Conceivably, their shareholders will grow so restless that they are taken over by foreign bidders. There might be short-term gain but probably the country would suffer in the longer run; home-grown industrial champions do have merit. I wonder if we have the national stamina to create any more companies of their might and resources.

Old assumptions about how venerable institutions can behave have changed rapidly. Mistakes and misdeeds by large organisations are punished brutally. VW is the latest under assault, facing possible fines and litigation costs of billions of dollars in the US. It is clear that doing business in America is increasingly dangerous; it appears that the Land of the Free is becoming the land of extortion. Having scale and deep pockets can be a big disadvantage in such circumstances.

I have served over the years in various capacities in a number of institutions of different types — the Financial Times, the Institute of Cancer Research, the Royal Society of Arts and Channel 4 among others. Some have been charities, some companies, some entities owned by the state. Most institutions find it hard to evolve, and frequently suffer from bureaucracy. Too many are obsessed about the past and in denial about the future.

Yet the quality and diversity of Britain’s institutions enriches us enormously — culturally, economically, intellectually and indeed morally. Overall, our various big and small institutions provide the operating framework for a civilised and prosperous society.

I’ve invested time in such organisations because it has broadened my horizons, and because I believe our institutions of different sorts do matter, and we take them for granted at our peril.

Organisations that have the capacity to endure are hard to create, and can be too easily undermined. They inevitably require excellent leadership: individuals who understand that they are custodians only, honest stewards who should act selflessly, and who should ideally leave the institution they joined in a better condition than they found it. Doing all that is easier said than done.