During the Golden Age the United Kingdom can be described as a malfunctioning LME. The inheritance from the nineteenth century remained in terms of the basic structure of financial markets and trade unionism but some aspects of both corporate governance and industrial relations became less conducive to good productivity performance. A major change from the early twentieth century was that these institutions were now situated in an environment of much weaker competition in product markets.
In these post-war decades, the main developments in terms of corporate governance were a much more pronounced separation of ownership from control in large companies, a ferocious merger boom and the advent of the hostile takeover. Fewer large companies were owner-controlled than the 58.5 per cent of Florence’s 1936 sample. In 1951 he found this share had fallen to 40.8 per cent (Florence, 1961) and subsequent studies on a similar basis for the late 1960s (Radice, 1971) and mid-1970s (Nyman and Silberston, 1978) reported 32.6 and 38.5 per cent, respectively.12 This reflected the retreat of family ownership, the dilution of equity holdings through mergers, a tax system which now hugely favoured institutional rather than individual share ownership and an environment of financial repression and inflation which led to financial institutions re-balancing their portfolios towards equities (Cheffins, 2008). In 1957 individuals and financial institutions held 65.8 and 21.6 per cent of shares, respectively, whereas by 1975 these fractions were 37.5 and 48.0 per cent, respectively (Chambers, 2014). Outside control became prevalent in quoted companies and the separation of ownership and control intensified especially because financial institutions were notoriously passive investors.
Firm disappearances by merger reached record levels during the 1960s and early 1970s. During 1960–1973, on average, 549 firms with a share value at 1961 prices of £531.6 million disappeared through merger each year (Hannah, 1983). The existence of an effective market for corporate control is indeed a key aspect of outside control of managers. However, the evidence strongly suggests that
this market did not work efficiently to discipline bad managers and remove poor performers. Size rather than efficiency or long-term investment was the key to survival (Singh, 1975). Mergers did not generally deliver productivity gains (Meeks, 1977) but were the result of management pursuing its own interests rather than those of the shareholders (Newbould, 1970).
These decades represent the apogee of strong but decentralized collective bargaining in the United Kingdom (Crouch, 1993). The modal form was still multi-unionism but more workers belonged to trade unions (46 per cent of private sector employees by 1972) while the coverage of collective agreements increased (70 per cent in 1972). The big change was the rise of the shop steward with an estimated 175,000 in 1968 and linked to this an explosion of individual plant bargaining including over both pay and work practices. Unions became bigger but, even so, there were still 454 in 1972 (Gospel, 2005). For much of the period governments steered clear of industrial relations reform and respected the hallowed tradition of ‘voluntarism’. This was hardly surprising given the prevailing approach of seeking wage moderation in striving for full employment with low inflation. Trade unions continued to enjoy the legal immunities given by the 1906 Trade Disputes Act. In the later 1960s, however, in the face of increased militancy and the inability or unwillingness of trade union leaders to deliver on wage restraint, political pressure to legislate grew and eventually the 1971 Industrial Relations Act was introduced. This act was only a modest attempt at reform but was a failure in the face of union opposition and lack of enthusiasm by employers and was repealed in 1974.
Given that bargaining now took place in an environment characterized by tight labour markets and considerable market power for firms, we might expect high rents of which unions could expect a large share at a time when their bargaining power was strong (Blanchflower et al., 1996). In so far as they used this to bargain for lower work effort (overstaffing) or to resist the introduction of new working practices then weak competition would undermine productivity performance (Machin and Wadhwani, 1989). Where competition is weak the principal-agent problems that arise from weak shareholders and managerial control are exacerbated (Nickell, 1996) and market discipline to prevent slow or inefficient adoption of new technology is undermined (Aghion et al., 1997).
Competition also promotes good management practices which payoff in productivity outcomes (Bloom and van Reenen, 2007). Although economic theory is ambivalent about the impact of competition on R & D, entry threats can be expected to promote innovation to protect future rents if firm survival is thought to be feasible (Aghion and Howitt, 2006).
Thus, we might expect productivity performance in the post-war British economy to be
adversely affected by the interaction of the institutional legacies in respect of corporate governance and industrial relations together with full employment and weak competition. This would seem to be a recipe for a malfunctioning LME. And indeed the empirical evidence lends considerable support to this diagnosis.
Econometric studies have shown the following. First, greater competition raised productivity growth where firms did not have a dominant external shareholder (Nickell et al., 1997). In this (typical) case, a fall in supernormal profits from 15 to 5 per cent of value added raised TFP growth by 1 per percentage point per year. Moreover, increases in interest payments relative to cash flow also promoted significantly faster productivity growth.13 Second, greater competition was good for innovation. Geroski (1990) found that, once differences in technological opportunity across industries were taken into account, in the 1970s the positive effects of market power working through expected profits were heavily outweighed by negative effects on managerial effort. Third, Bean and Crafts (1996) examined the consequences of multiple unions for TFP growth in an endogenous-innovation setting where, in the absence of binding contracts, it is predicted that innovative effort will be reduced by the expectation that the workforce will appropriate some of the gains. They found that the presence of multiple unions lowered TFP growth by 0.75 to 1 percentage point per year in the 1954–1979 period.
Case studies strongly implicate bad management and restrictive labour practices resulting from bargaining with unions in poor productivity outcomes. Pratten and Atkinson (1976) reviewed 25 studies of which 23 reported inefficient use of labour, in 21 cases from failings of management and in 14 instances from restrictive labour practices. Inefficient use of labour and industrial relations problems accounted for a significant productivity gap in multinational companies between British plants and those in Germany or the United States in 1972 (Pratten, 1976) which would not have surprised the business respondents to an Oxford survey in the late 1940s who thought such problems were prevalent (Andrews and Brunner, 1950). A strong theme in several studies which highlight low effort bargains is that they were sustained by the weakness of competition; for example, this emerges clearly in the study by Zweig (1951) and also in the seminal work in industrial sociology on restrictive labour practices (Lupton, 1963). A notable aspect of these bargains is that potential productivity gains from new technology were impaired (Prais, 1981). In a well-known and egregious case, motor vehicles, management completely lost control of effort norms in the switch to measured day work with disastrous consequences for productivity (Lewchuk, 1987).
In sum, the evidence is that multi-unionism and the separation of ownership and control
adversely affected United Kingdom productivity performance during the Golden Age. Corporate governance and industrial relations were clearly recognizable as the grandchildren of their Victorian predecessors but having mutated into more problematic forms and with a greater downside in the environment of weak competition that prevailed in these early post-war decades. In terms of Figure 1.1, this unfortunate combination of institutions and policy significantly reduced λ.