The dangers of populism for the energy sector
Populism is on the march. The shift away from factual, rational analysis was evident in 2016 in the Brexit referendum and the US presidential election. A new study from the Legatum Institute shows it is still running strong. The focus of the work is on the UK but there are obvious signs – from the German elections to the dangerous situation in Poland and Hungary – that the populist tide is flowing in many places across the developed world. For businesses accustomed to a world based on facts and hard evidence combined with the rule of law this is deeply uncomfortable. For the companies in sectors such as energy which can easily be targeted by populists it is particularly worrying.
The Legatum study identifies a shift in opinion against the open market economy which we have not seen for several decades. The study demonstrates that the private sector is regarded with contempt and seen as exploitative of both employees and consumers. The three words most associated with the private sector are selfish, corrupt and greedy. Profit is a dirty word, almost as dirty as the word global. People want controls on top pay and higher corporate taxes. The desire for nationalisation of water supplies, the railways and energy companies is strong and not limited to those on the left. Of those surveyed 76 per cent want the railways renationalised; 77 per cent want the state to take over the electricity business. These views come from the political right as well as the traditional left.
Of course the behaviour of some parts of the private sector has created and reinforced these attitudes. Ridiculous pay awards for top management – embarrassing even to the recipients; the systematic minimisation of tax payments by highly successful companies; the abuse of corporate power in negotiations with government over issues such as the contracts for new nuclear are just some of the most obvious recent examples of what has gone wrong. These examples may be exceptions but they are very easily seen as the norm. The public reaction may be ill informed and misdirected but it cannot be ignored. If companies fail to understand the problem they risk being overtaken by a wave which populist politicians will happily ride.
The question is what the bulk of companies can do to demonstrate that they are not greedy or exploitative. The energy sector is a reasonable place to start. The sector is full of companies which are large in scale, global, highly profitable (at least in terms of the absolute numbers), very well paid, capital rather than labour intensive, and apparently unaccountable to anyone. Because the number of companies engaged in any particular activity is small there is an inevitable suspicion of collusion and oligopoly. In short however unfair the caricatures may be, companies operating in the sector are an easy target. Anyone who doubts that should talk to the electricity retailers who are now threatened with a new set of price controls to end “rip off pricing”.
Two initial steps are necessary. First companies have to accept that they are part of society, and that they operate at the pleasure of those they serve. Those who ignore that reality and believe they can simply maximise their own profits at the expense of the wider community are liable to be badly caught out. Many companies half accept this line of thinking. They set standards of care and behaviour for themselves but in the new climate they will have to go further. Those who define productivity gains, for instance, simply in terms of cutting jobs will have to begin to take on responsibility for those whose jobs are lost. The development of supply chains and an active engagement in support of the whole community in which they operate is likely to become the new and more substantive definition of the rather tired and empty dialogue around “corporate social responsibility”.
The second step concerns governance. In all the recent cases of corporate failure the missing element has been the role of boards of directors. Ryanair, Bell Pottinger, Volkswagen and all the others have well paid non executive directors but they did nothing to prevent their companies getting into trouble. The problem is not unique to those companies. In most businesses directors have no contact whatsoever with consumers or employees and in many cases only minimal contact with shareholders. The traditional governance system is broken. To restore trust and to counter the wave of populism something better is necessary.
In the energy business boards should include genuinely independent members who understand the context in which companies are operating and the impact of their decisions. Some companies have applied this approach – creating independent groups of local citizens and specialists to advise on operations in particularly sensitive areas. That approach should now be extended across the whole span of corporate operations. Such groups should serve as a source of advice – warning against risks which might not otherwise be noticed, and as a source of support against irrational attacks.
Many companies I am sure are simply hoping that they can keep quiet, try to avoid mistakes and visibility, and hunker down until the tide of populism passes. That is too complacent. Populism is very dangerous and requires a systematic organised response.