Public Services and Predatory Shareholders

The trouble with the provision of public services such as health, education and the police by private for-profit companies is pretty obvious. Successive governments from Thatcher on, have pursued this flawed policy which derives from a hopelessly simplistic ideology. Private providers, who are subject to the discipline of the market, are held to be more efficient than public providers. The late lamented Milton Friedman claimed they were twice as efficient. Therefore, the argument goes, services would be most efficiently provided by private firms operating in competitive markets so that, for example, NHS patients have choice, and providers who are not good enough to get chosen, will fail. That’s how markets work.

So far so good, despite the famous lack of supporting empirical evidence, and the difficulties, where real markets don’t exist, of creating pseudo-markets without the costly bureaucracy of targeting, monitoring and supervising pseudo-competitive performance. But another thread of that same ideology, most famously enunciated by the same late lamented Friedman, is that those who run for-profit businesses have no social responsibility other than to make as much money as possible for shareholders.

Where this has been most enthusiastically accepted, as in the UK, its impact has been almost wholly destructive. Moreover, in case top executives should construe their responsibilities in any other way, they are converted through generous share option bonuses to becoming shareholders themselves. The deliberate intention is to corrupt them into the single-minded pursuit of their own self-interest and so to focus exclusively on maximising shareholder take. Sadly, we are almost all corruptible. Thus the nightmare scenario for the NHS is for it to be delivered by private for-profit companies whose primary aim is to extract value from the NHS and put it into the pockets of their shareholders.

Like the directors of Cadbury, taking massive bonuses specifically for setting up the disposal of their company to Kraft for an immediate shareholder gain; or Blackstone, making £500m for their shareholders by stripping out the main assets of Southern Cross nursing homes, before floating the company defenceless on the stock market, and leaving the NHS to pick up the tab; or the equity privateers who bought Boots the Chemist, loaded it with the debt they raised for its acquisition, pocketed the surplus and transferred the remaining company to a tax avoiding canton in Switzerland. Likewise, the directors of private NHS providers will be bound to seek, in accord with the ideology, to screw the NHS so as to maximise their own shareholder wealth.

Evenso, many company directors still strive to fulfil their duties as defined by the law (eg Companies Act 2006), to work for the long term prosperity of their business having regard to the interests of all stakeholders, not just shareholders. Such an approach is common practice where the word of Friedman is less dominant. In Germany, one of several examples briefly summarised in The Road to Co-operation, companies are governed by a two tier system, with the supervisory board having half its members being employee representatives. This ensures the company is not run for the sole purpose of making quick money for shareholders. The current crisis has shown how successful this more co-operative form of governance has been.

It seems unlikely that Messrs Cameron, Osborne, Lansley, and the rest, are hell-bent on the deliberate destruction of the NHS for the benefit of supplier shareholders. They presumably believe that firms taking over responsibility for NHS provision will simply be more efficient, rather than intending to exploit their contracts so as to maximise shareholder wealth. They must believe those firms will efficiently pursue a broader, longer term focus on satisfying the needs of patients and local communities as well as shareholders.
But it doesn’t need to be a matter of naïve belief. The privatisation of public provision is achieved through a tendering process, mostly for time limited contracts. It could readily be made an essential requirement that firms tendering for public provision contracts must demonstrate their broader orientation. This could be done, following the German example, by requiring them to have parent board membership also represent stakeholder interests other than shareholders. These could include employees, patients, the community, even the providers of non-equity capital. This would eliminate from the tendering process those companies whose sole aim was to exploit the NHS for the short term gain of shareholders. Similar structures could be required of all firms tendering for any public provision, in health, education, police or welfare services.

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