I didn’t start work in the City until six years after the Big Bang, so I never experienced first-hand the culture shock of those reforms, introduced 20 years ago this week. But even in 1992, it was impossible not to be aware that something momentous had occurred and that its effects were still reverberating around the Square Mile. At a stroke, the Stock Exchange had swept away fixed commissions, abolished traditional distinctions between jobbers, who traded on the floor of the Exchange, and brokers, who acted on behalf of investors, and opened the London market to foreign companies.
Within a few years, many of the City’s famous names had disappeared, their partners showered with cash by hungry US and European banks. Many regretted the passing of the old City. No one liked the new regime of early starts. British Rail had to lay on new services to get people from Surrey to their desks by 7am. The new, giant trading floors, with their rows of computer screens, made people feel like battery hens. And while my bosses stuck resolutely to their habit of drinking a bottle of wine at lunchtime, they were the last of their kind. Under the remorseless influence of the Americans, sales of bottled water soared and pubs gave way to gyms.
But while the City may have become a less pleasant, clubby place, compensation came in the rewards available to those who could hack it. Top City workers these days trouser bonuses that make the windfalls earned by the old partnerships look like pocket money. Big Bang transformed the City from a backwater to the world’s leading financial centre. As the City has sucked in money and business from all over the world, its profits have soared, and with it so have the rewards. But if Big Bang transformed the City, the last 20 years haven’t been so kind to other parts of the economy. While the financial services industry prospered, others all but disappeared. This week’s sale of Corus to India’s Tata Steel (see page 36) marks the final chapter of the home-grown steel industry. The ship-building and textile industries have long gone. The UK no longer has its own mass carmaker. Electronics went with Marconi. Among the big industrial firms still based here, Hanson is talked of as a bid target and BAE Systems says it may move its listing to the US. Industrial companies now comprise just 6% of the FTSE 100, compared to 26% of the S&P 500.
Are the two connected? Sure, some of British industry’s problems were self-inflicted. Weak management and powerful unions did for several sectors. Others, faced with competition from cheap labour in emerging markets, never stood a chance. Britain’s open markets also made its companies vulnerable to foreign takeover. More recently, British industry has had to cope with high taxes, red tape, a failing education system and a creaking transport network. On the other hand, it’s also fair to say that many UK companies taken over by foreigners are flourishing under their new owners, just as the City has thrived under foreign control. Even so, the City is partly to blame for manufacturing’s demise.
Its success has helped keep the pound strong, making it hard for UK firms to compete. And the City has lured away the ambitious, limiting homegrown talent available to other sectors. Compared to a job in, say, the steel industry, the City offers a low-risk, high-reward career, with little chance your job might suddenly transfer to Mumbai. Meanwhile, the most common charge laid against the City is its short-termism. Fund managers are said to be obsessed with quarterly performance. That in turn puts pressure on firms to look for ways to boost earnings to keep the share price high – often at the expense of long-term investment.
Is this criticism still valid? Perhaps. Since Big Bang, the City has become more sophisticated in the way it analyses firms and deals. Shareholder value is no longer measured by looking at earnings, which can easily be manipulated by piling on debt, but by looking at a firm’s return on investment and seeing whether it is sufficient to cover the cost of providing the equity as well as the debt. The City prides itself that this rigorous approach has made it more disciplined in the way it allocates capital. But the worry is it may also have made companies much more risk averse. Bosses no longer contemplate a deal unless they’re sure it will cover its cost of capital within a couple of years. In some capital-intensive sectors, that may simply be too high a hurdle rate.
Perhaps that’s why UK companies have been disappearing fast in the current takeover boom. It may also explain why the FTSE 100 has been one of the worst-performing major indices in recent years. Where Britain once boasted its Hansons and Whites, the real corporate buccaneers are now to be found in Germany, France, Spain, Russia and even India. As the City has become better at managing and valuing risk, it has squashed the risk-taking impulses of others. The anniversary of Big Bang will be celebrated in the City. But in British industry, the reaction may be more subdued.
Simon Nixon is executive editor of Breaking views.com