Earlier this month, Theresa May declared: “We believe in free markets and competition, but we want to see competition working.”
She believes in competition, but – not exactly a ringing endorsement. It shouldn’t come as a surprise: her policy chief, Nick Timothy, is known for his desire to move the Conservative party away from the Thatcherite purist free market agenda, towards one that puts the British national interest first. He thinks Erdington Man cares more about his country than about political orthodoxies, and so should the Conservatives.
Part of that planned move away from Thatcherism is a more interventionist competition policy. Traditional competition policy focussed on the proper functioning of markets, and precious little else. Its bias is towards non-intervention, only getting involved where the behaviour of companies has a serious impact on competition and the market. Timothy supports a more activist approach. His main target is foreign takeovers. He appears to believe voters don’t like the idea of foreign companies coming in and picking off prominent UK companies, and seems resolved to do something about it. That something will most likely take the form of a manifesto commitment to protect “critical infrastructure”: companies from cross-border takeover attempts.
In itself, introducing a “critical infrastructure” test may seem a logical extension of the “financial stability”: test that was introduced during the 2008 financial crisis. And before the 2002 Enterprise Act came into force, the government had an arguably even broader power to apply a widely interpreted public-interest test to any proposed takeover. It could block a proposed merger if there was an expected negative impact on the UK public interest (such as media diversity) or if the proposed merger clashed with national security priorities.
The political benefits of blocking foreign takeovers of companies that voters consider to be quintessentially British are easy enough to understand. After all, the kind of voters that the Conservatives want to win over love the idea of their government putting British interests first. The problems, however, are equally clear. It is yet another step in the direction of distorting the markets. The ultimate aim of competition policy should be to safeguard the proper functioning of free markets, not to limit the freedom of those same markets. And unlike the three existing exemptions, which are very specific in their focus, this new test is so vague in definition that it would be wide open to interpretative abuse. It would open the door for companies that in no way can lay claim to such a vital status to seek government protection from normal market forces.
To see what this would mean, look at Unilever’s lobby to obtain British political protection against a proposed takeover by the American company Heinz. Claiming that “national champions” like his company deserve a protected status, Unilever CEO Paul Polman called on the government to change the takeover code in his firm’s favour. Among other things, he suggested the introduction of a longer period of reflection in which the board of the company facing a takeover offer can prepare its defence. He also asked for a greater role in the decision-making process for stakeholders, at the expense of shareholders. It seems national and community interests – as defined by a company CEO – should come first in judging the merits of a foreign takeover offer, taking precedence over the fiduciary duties of the board to its shareholders.
The use of the words “national champions” was clearly designed to appeal to Downing Street’s patriotic policy chief. But never mind the irony of a Dutch CEO wrapping himself in the Union Jack: is Unilever really a national champion? Of its 175,000 employees, only 7500 are still based in this country. Most of its factories are located abroad, many in emerging markets. That’s also where most of its money is made. Or at least, used to be made, until key Unilever markets like Brazil, India and South Africa started slowing down. For a short while, the company managed to compensate for lower returns on investment in these countries through artificial means like increasing royalty charges (in South Africa, local business partners faced an overnight tripling of royalty payments, from 3% to 9% of turnover). These kinds of stopgap measures were never going to persuade shareholders, though. The Unilever share spent most of 2015 and 2016 bouncing along the bottom of the stock market. It was this continued underperformance, and critical reviews of company policy in business papers like the FT and the WSJ, which eventually made it a target for the Heinz takeover attempt.
Unilever’s attempt to hide its failures behind a smokescreen of patriotism should serve as a warning. The government would do well not to listen to the siren voices of those, like former business secretary Sir Vince Cable, who argue in favour of the introduction of a “public interest” test to takeovers. The Union Jack should never be allowed to become a defence against normal market pressures. It’s like the old “picking winners” problem in industrial policy: sooner or later, it ends up sponsoring the unprofitable, at the expense of shareholders and consumers.
Putting the “national interest” first may be a noble aim. But as Unilever’s example shows, it can easily morph into “the interest of failing multinational companies”. For a government aiming to put the concerns of ordinary workers and consumers first, that would be a serious mistake.
Joshua Livestro is a writer and independent consultant based in Guernsey. He worked as political adviser in Conservative Research Department in the late 1990s (with Theresa May, among others).