Bill Jamieson: Full speed ahead for retro charge to recovery

Published on Sunday 22 November 2009 21:03

GEARING up? Out of the window. Financial engineering? Forget it. Growth by acquisition? Yesterday's bad idea. Focus on shareholder value? Gone for the duration.

The remarks by CBI chief Richard Lambert this morning could mark a seminal moment in the history of UK business. He is firing us up for a retro charge back to the world of the 1950s and 1960s, and with a return, in new post-modern guise, of creatures such as the Industrial Finance Corporation to help the business sector.

It is not just that his speech will add to concerns of a slow and fragile recovery out of the worst recession in 50 years. He is saying in stark terms that we are in a new era for business and that management thinking will be changed for a generation. Most of the corporate mantras that became orthodoxies over the past two decades – in particular the belief that borrowing was the road to riches – proved dangerous accelerants to the crisis that finance capitalism is now in.

The obsession with leverage, short-term earnings performance and financial engineering that came to the fore has now driven many companies if not to the wall (like GEC) but to a state of crisis management marked by substantial cost cutting, labour shedding and painful de-leveraging. And it has a long way still to go: outstanding corporate debt is now 484 billion, a fall from its summer 2008 peak, but still twice the level of 2002.

"Financial engineering", declares Lambert, "is yesterday's story". This could be dismissed as an all-too-familiar CBI protest about the starvation of bank finance for manufacturers while property developers boomed. But he is right to argue there cannot be a return to "business as usual". The slump in asset prices – and in particular property prices – has killed off this model.

Hence the shift in thinking away from the notion of a conventional cyclical recovery to a new paradigm. It will be one altogether more conservative, less dependant on debt and in which companies come to rely more on supply trade finance, sovereign wealth funds and equity capital.

This marks a sharp reversal of the trend evident in the three years leading up to 2007, during which non-financial companies bought back about 40bn more of their shares than they issued. Much of this was accounted for by public companies being bought out by highly-leveraged buy-outs.

Lambert doubts whether banks, even after they have repaired their capital base to levels with which regulators are comfortable, "will have the firepower to finance a sustained period of economic recovery and growth". His particular concern is over the outlook for smaller companies that are not able to issue equity or bonds and are at the mercy of banks now repairing their balance sheets through wide lending margins and a re-writing of debt schedules with dire consequences for smaller firms.

For medium to large business, equity finance is back in fashion. The world has already turned 180 degrees with the new issue of equity so far this year totalling 25bn. But the immediate overriding change is one of caution, both within business and within the banks. Companies are likely to continue lowering risks to their balance sheets. The cost of credit will stay high and banks will stay risk averse.

How companies behave towards each other is likely to change. Lambert sees a more collaborative corporate model with larger companies recognising the need for their suppliers to stay afloat. This would suggest greater availability of supply chain finance.

And more will be needed, says Lambert, than a return of the banks to balance-sheet strength. Businesses will not wish to be so dependent on them again and certainly not dependent on two or three big banks. A greater diversity of banking services is needed as well as the means to ensure there is competition between the players left standing. New regional institutions offering hybrid finance – equity as well as debt – should be encouraged.

That will leave policymakers here in Scotland with much to think about. If it's a recovery we really want, change can't come soon enough.