Please note that this is BBC copyright and may not be reproduced or copied for any other purpose. RADIO 4 CURRENT AFFAIRS ANALYSIS IS SID DEAD? TRANSCRIPT OF A RECORDED DOCUMENTARY Presenter: Diane Coyle Producer: Chris Bowlby Editor: Nicola Meyrick BBC White City 201 Wood Lane London W12 7TS 020 8752 7279 Broadcast Date: 17.04.05 Tape Number: Duration: Taking part in order of appearance: Michelle Doughty Former stockbroker Author of ‘The Joy of Money’ Brian Brivati Professor of Contemporary History, Kingston University Angela Knight Chairman of the Association of Private Client Investment Managers Former Conservative Treasury Minister Sir Geoffrey Owen Former Editor of the Financial Times Senior Fellow of the Institute of Management of London School of Economics Tim Burke Head of Marketing for Edward Jones Mick McAteer Senior Policy Adviser at the Consumers’ Association COYLE: Whatever became of Sid? You remember him – he bought those British Gas shares when it was privatised in 1986. Michelle Doughty was a stockbroker at the time. DOUGHTY: It was a very exciting time to be a broker and to be in the city because there was so much happening – all these companies coming onto the stockmarket. And there was this sense that people were becoming more and more turned onto shares, something which I think prior to that really hadn’t happened; not on the mass scale that it happened in the 80s. COYLE: The privatisation programme put the stockmarket at the centre of the political stage. The Conservative government hoped to reach people’s hearts and souls through their wallets, creating what they often described as a share-owning democracy. Brian Brivati is Professor of Contemporary History at Kingston University. BRIVATI: There are two ways of reading the privatisation programme of the 80s. One way of reading it is about people’s preferences. Can you make the voters change their party allegiance by giving them more property ownership or shares? In other words, can you get them to buy information and voting Conservative over a number of elections because of what you’ve given them? Or do you want to change the voters themselves? If you go back to 1883 when the Times describes Disraeli, and I’m not quoting exactly, that Disraeli’s genius was to look at the English working class in the same way that a sculptor looked at a lump of white marble, and he could see the angel in the marble, which was the Tory voter in the working class. And the question is what was the shape of his chisel; that he was going to carve Tory democracy out of that working class. And throughout the 20th century, a good third of the working class voted for popular capitalism, Tory democracy. They were tapping into a form of conservative manipulation, social engineering on a material basis, which has a long history. COYLE: Two decades on, the ambition to turn us into a nation of shareholders has become part of the political consensus. In a recent pre-election speech, Labour Chancellor Gordon Brown quoted Tory Prime Minister Harold Macmillan advocating the wider ownership of assets in Britain. All the major parties are well aware that they need to encourage us to save and invest more if we’re to have decent pensions in future. On the other hand, after the boom and bust in share prices and several high-profile financial scandals, the idea of investing in the stockmarket is hardly attractive. Where does this leave the hope of wider share ownership? Angela Knight is chairman of the Association of Private Client Investment Managers, a trade organisation for investment firms serving individual shareholders. She was a Conservative Treasury minister in the 1990s. KNIGHT: The country went from having a population where actually there was a significant share ownership to one where the share ownership was much more broadly based. Lots of people, relatively small numbers of shares in many instances, had got something which they saw as being a way of saving. They had through their shares got something put by for a rainy day – a daughter’s wedding or whatever. And the hope I think at that time was that having got involved in share ownership in that way, then people would expand that share ownership and it would become a culture that was moving certainly towards the US culture where of course investing in shares is something that almost it seems that everybody does or thinks about doing. COYLE: Isn’t that a bit rose tinted? Weren’t a lot of the British Sids in it to get rich quick? KNIGHT: Oh well that of course was absolutely correct because at the same time as the arrangements were put in place so people could buy these shares, so of course exactly the same arrangements were put in place so they could sell them. And if you recall, some of the documents which individuals were sent said ‘tick here to buy, but if you tick in this second box we will sell as well’. So in fact you never actually paid out necessarily money. You got some…. COYLE: Free money. KNIGHT: Free money. Interestingly though was the numbers of people who actually decided to hold those shares. So I think you’re right in saying that the policy was rose tinted. In fact some of the policy was of course developed after the event. Nevertheless, it was a policy based on experience. That is, more people were holding those shares than I think had been expected. COYLE: How many of us actually own shares, more than two decades after the first privatisations? They did substantially increase the number of individual shareholders, from just 3 million in 1979. The number reached 15 million in 1997, thanks also to the demutualisation of the building societies. But the figure has declined since that peak. It’s currently about 11 million people. And because their investments are mostly small, the proportion of UK plc owned by individuals has fallen even faster. Sir Geoffrey Owen, now at the Institute of Management of the London School of Economics, was editor of the Financial Times back in the 1980s. OWEN: Lots of people bought shares and often sold them quickly thereafter to make a profit. I don’t think it has made a lasting difference to the ownership structure of British industry, which predominantly is in the hands of institutional shareholders, not private ones. COYLE: So that wave of popular shareholding was an aberration? OWEN: It could be described as an aberration. Obviously it was a way of ensuring the success of the privatisation process, I suppose, in order to encourage lots of people to take up the offer. I don’t think it’s really altered the general trend for people in this country to own shares via collective institutions you know like unit trusts or pension funds or whatever. COYLE: There was quite a lot of intellectual firepower at the time, wasn’t there, behind the idea that individual shareholding was somehow going to be important and make a difference? OWEN: It was part of the general Thatcherite drive for a more entrepreneurial economy, more markets, more self-reliance on the individual’s part. It certainly very much formed part of the overall sort of Thatcherite agenda. I don’t think it really altered attitudes towards investment. COYLE: So what went wrong with the dream of wider ownership, if more of British industry than ever is in the hands of big institutional investors, the pension and life assurance funds? After all, in the United States half of all adults own shares, compared to just one in four in Britain. Tim Burke is head of marketing for Edward Jones, an American investment company which has started expanding into the UK. From his perspective, the glossy privatisation campaign here in Britain failed. BURKE: It didn’t really encourage share ownership. It ended up dealing people shares without really explaining to them what the risks were and everything else. What we find our clients here are really starting to understand even more is that they have to take ownership for their own retirement savings; that the government pension and maybe the pension from their company is not going to fully take care of them in retirement, so they have to do some of that on their own. And, again, they don’t really know much about the financial services industry because it’s not the industry where they’ve grown up or where they’ve gained their expertise. I think share ownership is going to have to get bigger, but hand in hand the education is going to have to come along with it as well. COYLE: Better education for would-be investors is seen as crucial by former stockbroker Michelle Doughty. She used to run ProShare, which aims to educate and encourage private investors, and is the author of a book called ‘The Joy of Money’, so she’s an enthusiast for shares. DOUGHTY: Share ownership is something that a lot of people shy away from. We had a pretty severe bear market. And what you tend to find is that in the bull market everybody loves shares; and as soon as anything goes wrong or we have the dot com boom and bust and then we have a bear market, people absolutely clam up. There are millions of people out there today who would like to know more about how to invest their money but who are just turned off because they haven’t understood or they haven’t been taught the sort of basics that they needed to know. To understand, for example, risk and reward – you know the risk of owning shares. COYLE: Aren’t they vindicated by the fact that it’s risky, that the market goes up and down so much? DOUGHTY: Yes. But, on the other hand, if you look at the statistics you’ll see that over the really long-term, shares have still been an incredibly outperforming asset. COYLE: But it’s hardly surprising that people are sceptical about investing in the stockmarket. Memories of the Millennium hype about dot com shares - and the correspondingly painful fall in share prices that followed – are still raw. Those exciting high-tech companies seemed to embody a new, entrepreneurial Britain, but they were disastrous for the small-scale investors tempted to put money into them. DOUGHTY: That was a classic financial mania, which got millions of sane people believing that they could become multi-millionaires overnight. It’s happened before – the South Sea bubble back in the 18th century I think was a classic example. My own view is that that kind of hype can never last. With the dot com boom, as we have now seen, there’s only been a half a dozen companies that have come out of that unscathed and have actually produced real businesses. KNIGHT: I think in fact the excitement of the dot com boom was probably the worst thing for small shareholders because so many bought in quite late in the day. COYLE: Angela Knight. KNIGHT: It seemed that anything that had got dot com around it or technology, you name it, was going to be a whizzo banger success, and so they bought in late in the day. So they caught the worst cold; you know the market fell and they were left holding something which was much less than that for which they had paid. So that did not actually do long term the small shareholder any good. COYLE: So even the head of an organisation advocating share ownership believes our financial education leaves a lot to be desired. As often happens, individual investors bought their dot com shares at exactly the wrong time, when prices were high. Many then sold at a loss when prices were low, and have continued selling out even though share prices have started to rise again. No-one could argue with the idea that we need a bit more financial savvy than this. But is knowledge the only barrier to extending share ownership? Professor Brian Brivati thinks there are much deeper-rooted cultural obstacles. BRIVATI: The language of it became not to do with small ‘c’ conservative values because, after all, owning your own home, owning shares, owning a small company and so on are actually socially and culturally conservative things to do. It became you know greed is good and it was somehow connected with Wall Street and aggressive capitalism. And I think that was politically a crafty mistake by the Conservatives to embrace that kind of language. Culturally it just didn’t play here in the same way. COYLE: While Americans dreamt of becoming rich through the stockmarket, in Britain people took the shares but despised the yuppies. It seems that many small-scale British investors are still uncomfortable with the raw profit motive. Angela Knight puts a brave face on their anti-capitalism, which is ironically most on display when they exercise their shareholders’ rights to challenge the top brass over executive pay at companies’ annual general meetings, or AGMs. KNIGHT: Quite often the tricky questions at AGMs are raised by the individual. I mean institutional shareholders don’t ask questions at AGMs. The individual sometimes will want to know pretty pertinent, pretty simple questions they ask. The answers are ones which concentrate the minds of those who’ve got to answer and, prior to the AGM, will concentrate the minds of the board. Let’s take the most obvious ones: have we got companies thinking about environmental consequences to their actions in this country? So in the sense of is it a situation whereby certainly in the major PLCs, the small shareholders can come in and vote down a proposition, the answer is: not really - though that does happen in smaller companies. But do they have valid points which ultimately result in boards giving consideration to them and the direction of the companies sometimes being affected? The answer is yes, and probably more often than people think. COYLE: And some companies return the compliment, feeling rather lukewarm about most of their individual shareholders. Recently the mobile phone operator O2 tried to cut down on its million-plus small investors, inherited from the original BT privatisation, by offering to buy back their shares at a very generous price. The company said the administrative burden of small shareholders was too high. Sir Geoffrey Owen of the LSE’s Institute of Management thinks other companies are not all that interested in their small-scale investors either. OWEN: It’s certainly the case that in most companies well over half the shares are owned by institutions of one sort or another, including non-British institutions, and that some of those institutions own significant blocks of shares and maybe five, six or ten or even fifteen percent sometimes. So that those say half a dozen big shareholders in a company are taken extremely seriously by the board and the managers, so that’s the main focus of attention on the part of companies. I think companies treat their private shareholders respectfully. They want them to support the company and to understand what the company is doing. COYLE: I’m sure they always say they regard them with respect, but there must be a bit of a nuisance factor, mustn’t there? OWEN: Well there’s a nuisance factor I imagine for companies, which either because of the privatisation thing or for other reasons have thousands of very small shareholders, and that’s quite a cost. COYLE: But nuisance or not, the very fact that some investors do now question how well companies are run is a legacy of the original drive to extend share ownership. According to historian Brian Brivati, the package of reforms which included popular shareholding made the public more demanding about the management of the economy as a whole – which was in fact the aim of the right-wing thinkers who came up with the idea of privatisation. BRIVATI: For those new right philosophers like Arthur Seldon, Ralph Harris, Alfred Sherman, for example, the Conservative party’s adoption of these policies was incidental. They wanted to change the nature of Britain. In that project, I think they broadly succeeded in changing our attitude to property in creating a more entrepreneurial culture. In the short run, it certainly helped Thatcher win elections in 87, in particular. Most of the privatisation occurs after the 83 election. It’s an important feature of 87. But in a way the successful project of changing people in the end is detrimental to the Conservatives’ electoral fortunes because I think privatisation, property ownership, lower taxation, a whole nest of cultural changes create a broadly floating electorate who want competence. So what Labour has to do in order to win again is merely prove that they can continue to run the economy in the competent way the Tories have been doing in the 1980s and the electorate has changed and they’re quite happy to switch. They’re not long term Conservatives; they’re long-term competence hunters. COYLE: No wonder, then, that all the parties are emphasising their economic credentials in their campaigns. But can any of them get us saving and investing more in the stockmarket to fill the gap left by the closure or collapse of so many traditional occupational pension schemes? Mick McAteer is a senior policy adviser at the Consumers’ Association, which sees investing for our future pensions as today’s biggest public policy challenge. McATEER: What we’re seeing now is a massive transfer of risk from the state and from employers as they close down their final salary schemes away from the state of employers onto the shoulders of individuals who are expected to use the capital markets to fund a secure and decent financial future, particularly in retirement. But as that transfer of risk and responsibility is happening, we are finding that consumers are not actually willing to accept that transfer of result, with the result that the UK faces a massive pensions crisis. In essence, what would be crucial if we are to ensure that people have decent incomes in retirement and to ensure that people do save for the future, is a sense of security will have to be instilled in the population. They are just not comfortable with the degree and the types of risk that are inherent in long-term financial planning at the moment. COYLE: That’s hardly surprising. Imagine only being able to afford to retire if you correctly predicted share prices twenty years ahead: the prospect would terrify anyone. After all, plenty of experts in the financial services industry seem to have got it very badly wrong during the past twenty years. Angela Knight, with the experience of running an association for investment firms, accepts that assessing financial risks is inherently difficult. KNIGHT: Whilst we are able (all of us) I think reasonably to assess the risk of crossing the road under a whole different variety of circumstances, we’re not very good at either explaining or indeed understanding the risks associated with investing in the market. The need to try and interpret as well what the adviser for example thinks of as low risk and what you think is low risk is also quite a difficult thing to do and sometimes there’s mismatches there. And all that type of discussion is complicated and so you suddenly have something that’s gone from simple bricks and mortar to something which is more intangible, where the language is a bit difficult, where it’s not so easily comprehensible, and where I’m not sure that what you talking about risk is the same as what I’m talking about risk. That’s what has made investing perhaps not as popular as sometimes one would hope COYLE: That’s a real contrast to the other element of the popular capitalism dream, home ownership. Unlike share ownership, the high level of home buying since council house sales began has been sustained. We’re all housing market obsessives. It’s hard to imagine anyone getting excited about a 0.2% rise in the FTSE100 index, but tiny changes in house prices are headline news. And while Gordon Brown would like to encourage saving in any form, he too puts more weight on people owning their own homes - even though the proportion of owner-occupiers in Britain is one of the highest in the world already. But Mick McAteer of the Consumers Association sees dangers in emphasising bricks and mortar rather than the intangible benefits of stockmarket investment. McATEER: What the access to the housing market has encouraged is greater debt and greater current consumption. It’s actually worked against the objective of actually persuading consumers to defer gratification and save for the future, which is in a sense what pensions are about. The pensions contract is all about persuading consumers that it’s actually worth foregoing current consumption in return for something in the future. The contradictory effect that property has, we think, is it actually has encouraged greater personal debt; it’s encouraged more current consumption. I mean and it’s actually made consumers believe that property is a one-way bet and pensions are a negative product. So that we think that in essence property’s actually acted against the dream about encouraging long-term share ownership. COYLE: Many people seem to have forgotten that house prices too can go down as well as up. In the last housing crash hundreds of thousands of people had houses worth less than their mortgages, and a quarter of a million had their homes repossessed during the early 1990s. With many experts predicting another housing crash soon, it’s hard to see why we distrust stockbrokers so much more than mortgage lenders and estate agents. Financial mis-selling means people are rightly sceptical about any investment advice. But investing in the stockmarket, not the housing market, will give us a share in the growth of the economy. Of course, it would be foolish to gamble with your lifetime savings if you’re counting on the money to retire. Tim Burke of Edward Jones makes safety-first a selling point when he’s trying to persuade people to invest. BURKE: What happens a lot of times is it’s very easy to get caught up in the excitement of a new product or a new technology and oftentimes what we find is we end up telling our clients no. We love it that they’re risk averse because those are the types of people who are very careful with their money and make sure that before they go into something, you know they’ve done the research on it. If you look at the studies for example over the last hundred years, the shares market has been the best place to have your money: it’s done better than property, it’s done better than anything else over the long-term. What a lot of people remember though is the recent past. If you look at the recent past, in property you’ve probably made more than money than you’ve made anywhere else. I mean we’ve had three very bad years in the shares market. But over the long term you need to be diversified, so you need to have some money in property definitely but you need to make sure that you’ve got money in shares and you’ve got money in other places. COYLE: Despite all the flaws in how the stockmarket works, then, as many people as possible will need to own shares in order to build up their assets in place of state and company pensions. Despite the ups and downs of the market, the returns from owning shares are high if they’re held for long periods. A Sid who bought British Gas shares in 1986 and saved the dividends as well would have made a return of about 1,500 per cent by now. The problem, according to Mick McAteer, is that planning for a pension means thinking about growing old. McATEER: Consumers look upon the future as being a distant mirage. It doesn’t register in their daily concerns, so you’ve all those psychological barriers against long- term pension provision. Then you add them to the fact that you know there’s been massive scandals in the city involving pension mis-selling, equitable life, mortgage endowments and so on. There is a real problem with confidence and trust in the industry as well, so the barriers to getting people to save for the future are actually quite huge at the moment. COYLE: It’s Tim Burke’s job as head of marketing for his company to try to rebuild people’s shattered trust in long-term investment. He’s aiming to introduce a homely, Main Street style of popular capitalism to the UK, given that the Wall Street version has been so badly tainted by experiences of recent years. BURKE: We put our local advisers in the community and they go round meeting people, so they knock on doors, they call on businesses and introduce themselves. Our average client is probably fifty to fifty-five years old. We don’t necessarily target the super wealthy. We’re just looking for somebody who is a serious long-term investor, so that could be anybody from somebody who is retired, maybe somebody contemplating retirement that maybe owns their own business, all the way down to pretty much just about anybody. As long as they’re serious about investing, those are the people that we’d like to talk to. COYLE: I’m just trying to get an impression of how they go about it because I can’t imagine that you sell investment products to people by knocking on the door. If somebody came to my door and said, “I want to talk about your financial needs”, I’d send them away. BURKE: No, absolutely, and that was my initial impression too when I joined Edward Jones – how do we even do this? COYLE: The whole financial services industry is asking itself how to win back consumers’ trust. Even when a friendly and familiar face, someone you might meet at a barbecue or the golf club, is helping you make your investments, people can easily be discouraged from owning shares. BURKE: One of the things that we do is we make sure that if the market is down, we are calling every single one of our clients to say, number one, remember when we talked about this investment in the first place, we knew that there were going to be down periods. Well this is one of those periods. COYLE: And have you had to make these difficult phone calls yourself? BURKE: When I was in America, the most difficult was when I had to call my father to explain this to him. At the time I was an analyst and he said, “well give me your best recommendations”. So we talked about them. This was in December of 1999. In March of 2000 is when the shares market took a big downturn in the United States. So we spoke over the phone in March. You would think that there was a buffer because we were father and son, but you know there wasn’t. It actually makes it a more difficult call rather than an easier call. COYLE: Most of us, thankfully, don’t have family ties to complicate our investment advice. But we all face the same dilemma. Shouldering more responsibility for our pensions means we have to invest in shares because they give the highest returns to our saving. But the scandals have badly undermined confidence in investing. Is there a better approach? Mick McAteer of the Consumers Association thinks so. McATEER: Traditionally in the UK we have relied on what they call the retail model, the individual model where consumers buy shares either directly in the market or else they use insurance companies or unit trust firms to provide that access. We don’t think that model has been particularly successful in the UK, mainly because the level of consumer influence on the market has been pretty low. We think by far the best way to ensure that consumers do have access to the market in cost effective terms and on fair terms is to use what we call the collective approach, which is popular in Holland and some of the other European companies, where you have a group of individuals such as trustees whose job is to intermediate on behalf of the individual with the market itself. We think that is by far the best way to provide access. COYLE: A collective approach to investment, then, may be the best way to take individual responsibility for long-term saving for our future. People can reduce the cost of commissions and get better advice if they combine their investments. This mutual form of investment would dismay the Thatcherites. So did the original ideal of wider individual ownership ever make sense? Angela Knight, once a Conservative minister, not surprisingly thinks it did, even if only as one part of a shift in responsibility away from the state. KNIGHT: We moved from a country where our major industries were run by government to a country where our major industries were run by business and invested in by a wide range of investors either directly or on behalf of those individuals because we talk about institutional investors but that’s the pension funds as well. So it changed dramatically the landscape. And whilst we now have debates as to, for example, who should run Railtrack, we have no debates about who should run the oil and who should run the telephones and those sorts of things. So did it change hearts and minds? The answer is yes. I think though that maybe it changed it more in terms of housing than it did in terms of shareholding. COYLE: Professor Brian Brivati doesn’t think the share-owning democracy lived up to the hopes of the privatisers. And those 80s campaigns aimed very much at men like Sid and promising a quick profit seem dated now we all need to take long term investment so seriously. But the ambition of extending shareholding was nevertheless a symbol of other, lasting changes. BRIVATI: You need to look at the whole notion of an enterprise culture and support for small businesses being created, the cut in direct taxation and capital taxation. So on its own, I agree – I don’t think privatisation did a lot in terms of expanding share ownership – but as one of a number of substantial policies, as a package it created a mood and a zeitgeist which began, I think, to alter peoples social and cultural values. COYLE: Those values don’t seem to have changed enough to make us embrace share-ownership wholeheartedly. The stockmarket boom and bust, and all the financial scandals of the 1990s, look to have vindicated small- scale investors who decided shareholding was too daredevil for them. The irony is that the steady retreat of the state from providing us with security in old age, part of that transformation of Britain since the 1980s, means that now more than ever we all need to own shares ourselves. If you see Sid, do tell him. 14