U.K. Plc's Big Question Needs Answering

Tax cuts won't explain what leaving the EU means for business.

Business leaders in Britain heaved a sigh of relief after Prime Minister Theresa May backed down on her controversial plans to install worker representatives on company boards on Monday.

She's now trying to win CEOs back with a pledge to cut taxes. But all they want to know is what Brexit means for them.

Since replacing David Cameron as prime minister in the wake of the Brexit vote, May has argued that to maintain support for free-market capitalism, the benefits need to be spread more evenly.

For CEOs, the outcome in policy won't be as scary as they feared.

First, there's tax. May's biggest task is to convince overseas firms to locate or remain in Britain. There are many reasons they may do that: access to European markets, a skilled workforce, flexible labor laws, a predictable legal framework and low taxation. After Brexit, access to EU markets is in doubt. She must therefore add more weight to the rest.

How Low Can You Go?

U.K. corparate tax rates have been steadily falling since the financial crisis.

Source: KPMG

But the government has only one lever it can pull with immediate effect -- tax. It can't improve the skills of the U.K. workforce overnight. Hence May's pledge on Monday to give the U.K. the lowest rate of corporation tax among the G20 countries. (It's already down to 20 percent today from 30 percent a decade ago.)

With Donald Trump already committed to slashing corporate taxes, May will want to go as far as she can afford. The hope must be that the forgone tax revenue is offset by fiscal gains from increased business activity. While Brexit uncertainty is a deterrent, that's no given.

CEOs had been exercised by May's early suggestions of putting workers and even consumers directly on boards. She now says these groups just need their voice to have some form of representation, perhaps through an advisory panel. 

It now looks a more palatable proposal. U.K. directors are already required to act in the interests of the company as a whole, not just shareholders. While it would be a retrograde step to promote special interests, boards have often proved tone deaf to the wider world. Just witness the outcry at the 20 percent pay rise BP Plc gave its CEO last year.

Policy that gives boards a better sense of the society in which they operate -- and especially more incentive to exercise discretion over provocative pay deals -- is to be welcomed.

Shareholders are also likely to have more say on pay. Again, it's hard to argue with that. It is still too easy for company leaders to make enough money to secure their own financial security while leaving the company and its shareholders worse off.

For May, these measures are part of a plan to address the familiar disease afflicting the U.K. economy, symptomized by an imbalance towards London, poor commercialization of science, and weak productivity. That's why she's also introducing tax breaks for research and development as well as a couple of task forces, including one led by private equity veteran Damon Buffini that will look at long-term financing for innovative businesses.

No harm done. But these tweaks don't add up to an industrial strategy. And they fall a long way short of showing what Brexit will mean for business.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Chris Hughes in London at chughes89@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

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