Containing,embracing and hyper-activating Britishness: British-based foreign-owned firms

Distinguishing Britishness and BBFOFs: The potential for rule-making?

As a category to frame theoretical development BBFOFs are empirically nuanced due to the presence of increasingly sophisticated and diverse types of firm in the UK. Therein BBFOFs owned by new stakeholders or by a consortium of international investors illustrate sub-national differentiation (Ebenau, 2015: 54) where at firm level there is the space for ‘models in models’ (Morgan, 2005), ‘clusters of companies’ (Lippert et al., 2014: 13) or ‘variegated capitalism’ (Jessop, 2015: 77) within a particular national capitalism. Therein internationalization in ownership has the potential to dislodge a previously British firm from path dependency via strategic control by new stakeholders which internationalizes ownership but narrows the ownership base of a firm. Alternatively, international consortium ownership may widen ownership both directly and indirectly. Recognition of the dynamic political economy which informs these ownership changes brings capitalism ‘back in’ to the contemporary evaluation of British capitalism rather than evaluating the British economy as a static liberal market economy where rule-taking is systematically defined (Coates, 2015: 24; Streeck, 2009). Rational institutional approaches that inform the coordinated market economy/liberal market economy dichotomy conceptualize mid-level coordinating variables as ‘rule-taking’ mechanisms: for example national systems of corporate governance and finance, associated inter-firm relations, industrial relations and systems of vocational training and education (Finegold and Soskice, 1988, Hall and Soskice, 2001: 1–71). As ‘rule-taking’ coordinating mechanisms the rationalism within these embed and ground conflict over resource allocation at firm level where the strategic choices of actors defer to nationally distinct institutional settings which frame these variables (Goyer et al., 2016). It follows from this that the varieties approach explains variations within a class of phenomenon, for example finance and corporate governance or industrial relations, on the basis of the presence of institutional differences where critical junctures in institutional formation lock-in particular pathways (Hall, 1986). From this beginning the varieties of capitalism approach has become both a typology and static explanation of comparative institutional difference (Coates, 2015: 17–18).

Developments in the political economy of British capitalism, for example, financial and ownership deregulation and the active embrace of foreign direct investment, have informed the diffusion of BBFOFs. Put another way, the overseas acquisition of many British firms is a dialectic which has the potential to undermine rule-taking mechanisms derived in the varieties approach (Harvey, 2007: 62, 70–73). It follows from this argument that complementarities are not always static or equal to those depicted in business systems and comparative political economy literatures. Comparative institutionalist approaches to international business research have previously examined the influence of overseas firms on a business system and how a business system may counter this influence. Whilst revealing in the evaluation of innovations in cross-national employment relations management and subsidiary autonomy, prominent contributions do start from a strong country of origin premise within the comparative institutionalist approach defined by Hall and Soskice (see Almond and Ferner, 2006). Instead of this, the emergence of BBFOFs in British capitalism may represent a decoupling between micro-level firm behaviour and ascribed macro state behaviour in the varieties approach where firm-level rule-making across coordinating mechanisms overrides ascribed system-level rule-taking. So BBFOFs are likely to be a contemporary driver of change however marginal and incremental, which Deeg and Jackson (2007) argue it is essential to reflect on.

By association, the consistency of complementarities assumed to be present in Britain’s liberal market economy may deviate from the national pattern substantially (Lippert et al., 2014: 13, 232). Streeck (2009: 99) provides comparative support for this argument in respect of German capitalism. Therein for Streeck institutional change in German capital markets and patterns of corporate governance proceeded through a complex interplay between the government, political parties and industrial and financial capital. This interplay preceded change in shareholder value-seeking behaviour by German firms and financial institutions. In German capitalism the movement towards shareholder capitalism and in British capitalism the diffusion of BBFOFs have the potential to detach aspects of corporate governance and firm-level finance from pathway dependency associated with assumed approaches to mid-range variables. This may effectively de-nationalize (internationalize) a firm, stimulating a substantive loss of national identity beyond historical association. ‘Boots the Chemist’, for example, is now one brand owned by the larger Walgreens international group and T-Mobile International is now separate from Deutsche Telecom in Germany. This de-nationalization may render established tools in comparative analysis such as national identity and the predictive power of country of origin effects, host country effects and sector effects less certain.

Compliance with (home or host country) institutional features in British or German capitalism is traditionally evident in albeit perfunctory managerialism embedded in firm-level rule-taking by firms that operate in Britain or Germany. The presence, however, of new financial intermediaries and global investor-owners in firms has witnessed significant moves away from minimalist rule-taking to more open efforts at rule-making. The imperative of short-termism associated with capital flows in financial markets has the potential to detach aspects of (embedded) management practice in HRM and implicit contracts with employees from established host country features in British capitalism. A willingness to renege on individual and collective implicit contracts agreed with a workforce illustrates these breaches in firms dominated by new investment business models (Appelbaum et al., 2013).

Distinguishing the dynamic drivers of change

A focus on the dynamic drivers of change is necessary to distinguish BBFOFs from Britishness and to distinguish them from the characteristics of stake-holding firms defined within the varieties approach for several theoretical, institutional, political and empirical reasons. First, theoretically and institutionally the coordinated market economy/liberal market economy dichotomy associated with the varieties of capitalism framework is ill-equipped to deal with analytical categories that capture empirically dynamic developments such as BBFOFs. By examining the development of BBFOFs it is possible to evaluate the strategic agency of these firms in relation to the institutions which govern capital in a national capitalism rather than these institutions alone. Institutions and the relationship they have to a national capitalism is continuously reinvented by the interplay between rule-taking and rule-making (see Streeck, 2011: 142). For example, in British capitalism financial deregulation changed the relationship between financial firms and non-financial firms as the process of financialization emerged to structure patterns of rule-making in both types of firm centred on the securitization of investment and firm-level assets which boosted corporate borrowing dramatically (Augar, 2009: 12–13). Similarly, the process of privatization supported foreign direct investment, which has witnessed new types of employer and new forms of investor-owner diffused throughout British capitalism.

A concentrated ownership presence in NSDFs or firms controlled by ICIs is not sufficient to overturn the embeddedness of short-termism in British capitalism. However, more sheltered BBFOFs associated with patient capital which exhibit these characteristics do have the potential to contribute to contemporary debates on Britishness by demonstrating within-system ‘dualism’ (the presence of Britishness and BBFOFs). Such dualism can enable and facilitate the socio-economic space for the emergence of ‘loose coupling’ (between established and newer ownership forms – BBFOFs) or ‘de-coupling’ (where the consistency of a national capitalism is diluted by new forms) (see Deeg, 2005; Thelen, 2009: 474, 482; 2014: 4, 19–20). It follows from this that Britishness may not rein in rule-making behaviour in all BBFOFs, whereas BBFOFs are now part of a more heterogeneous pattern of ownership where capital may be more patient than is often described in established ownership forms in British capitalism.

A second reason to distinguish Britishness and BBFOFs in British capitalism is the recognition that institutional analyses are often built around a specific research design, namely how the presence of institutional differences account for observed variations in an outcome variable of interest (Dobbin, 1994). Accordingly, it is necessary to appreciate that conflict over resource allocation and constrained choices are mediated by the institutional setting in which they take place (Campbell, 2004; Whitley, 1999). Despite this, institutional approaches that focus on coordinating mechanisms in pathway-dependent mid-range variables struggle to explain and are unable to rein in the emergence of structural changes in contemporary capitalism that enter business systems fully formed. For example, new patterns of ownership inform mid-range variables such as finance and corporate governance and industrial relations where concentrated ownership structures and commitments to training and development in stakeholder dominated firms may not accord with embedded modes of operation informed by Britishness.

Within a national capitalism differences are evident in firms controlled by new dominant stakeholders, making it necessary to conceptualize how and why endogenous structural developments prevail – how British-based foreign-owned firms bend and stretch Britishness in British capitalism. In ICI dominated BBFOFs, externally informed firm-level management drives efforts towards rule-making. Rule-making may initially appear deviant to established approaches but too may hold the potential to over time modify established approaches to mid-range variables such as industrial relations. A further (historically informed) comparative example substantiates this argument: Kochan et al. (1986) charted the transformation of American industrial relations during the early 1980s where external drivers transformed attitudes towards the operation of American firms and the management of labour more specifically. Kochan et al. (1986) pre-figure and set the ground for the arguments popularized by O’Sullivan (2000) on movements in the embedded liberalism of managerial capitalism (Ruggie, 1982) from a ‘retain and re-investment’ mode to a ‘downsize and distribute’ model informed by neoliberalism. This transition held particular consequences for labour in what were previously viewed as safe internal labour markets. This transition legitimized a central concern with capital markets with the market for corporate control and investor value that for some began to dis-connect established circuits of capital in managerial capitalism (Appelbaum and Batt, 2014: 15–22; Clark, 2009a; Thompson, 2003). Similarly, Appelbaum et al. (2006) argue that deregulation and changes in financial markets have increased pressures on firms to achieve short-term results which often militates against the longer-term interests of employees. Further still, it has been suggested that institutional analysis which traditionally posits the (sometimes reluctant) acceptance of rule-taking by actors must instead accommodate the presence of rule-making by actors, in particular the state and multinational firms. Such rule-making can re-shape a national capitalism but often in a contingent or dialectical manner, not one which is systematic (Krippner, 2011: 16–23; Streeck, 2013: 141–142).

A third reason to distinguish between Britishness and BBFOFs is that contemporary re-shaping within British capitalism builds on established approaches where global dynamics result in dominance effects flowing from practices developed in leading economies such as the USA and Japan, which reign in firms like Toyota or major sectors such as finance (Smith and Meiksins, 1995). Contemporary approaches echo this and seek to identify the impact of external influences on work organization at firm level to suggest that pressures for convergence centre on the presence of dominant practices which change periodically (Edwards et al., 2013). Therefore to remain relevant to the contemporary period these approaches must demonstrate how the presence of international consortium investors exposes some BBFOFs to capital market pressures and capital market investor-owner pressures. Conversely, the approach must demonstrate how autonomy does however remain present in firms that appear as outriders to Britishness, for example in those ownership forms dominated by new stakeholders.

It follows from this that it is increasingly necessary to look at the pattern of firm ownership and who provides capital within BBFOFs rather than to assume a pattern of behaviour determined by Britishness or the country of origin of a BBFOF. Here the arguments developed by Lippert et al. (2014: 76–92) are instructive. In a study of the automotive supply industry they classify firms as sheltered, unsheltered and those that are private equity backed. A firm is sheltered from financialization and stock market pressures associated with the pursuit of short-term investor and shareholder value if it is private or if it is listed, is employee-owned or controlled by a dominant investor, termed in this article NSDFs, for example, Bentley, Bombardier, JLR, Mini and Rolls-Royce Cars. Conversely, a firm is unsheltered if it is private or listed and exposed to investor pressures which dictate the distribution of profit to owner-investors and managers. In this study BBFOFs controlled by ICIs, for example, BAH and Thames Water, fit this category. Finally, firms owned by and in particular those recently acquired by private equity backed investors are subject to similar pressures to unsheltered firms. However, in terms of the argument developed in this article these pressures may be hyper-activated because profits are necessary to pay off the liabilities of the private equity owners and meet the expectations of their investors, Travelodge fits this category in this study. Royal Mail too now exhibits these characteristics following its privatization, which has exposed its operations to investor and shareholder pressures. These pressures may intensify in Royal Mail as it becomes less sheltered through the presence of activist investors.

So whilst JLR and Mini are controlled by dominant stakeholders, it is the case that both the Indian corporate sector and large firms in German capitalism more broadly are moving towards business models where the overriding objective is investor and shareholder value. For some this movement brings into question the close knit personal networks which inform the conglomerate nature of family-controlled firms such as Tata in India and BMW in Bavaria and the associated coordinated market economy credentials ascribed to many large German firms (Balcet and Ruet, 2011; Streeck, 2009). Nonetheless, whilst it is clear that some German firms do not transfer home country approaches in corporate governance and industrial relations to overseas operations, it is the case too that the majority which have chosen not to do so are or have recently become less sheltered, for example, DHL, Deutsche Post, T-Mobile and Siemens (Human Rights Watch, 2010: 95). In contrast to this BMW and VW, which are dominant stakeholders in BBFOFs, remain sheltered firms due to domestic family control or co-ownership by the local state. These shelters may drive firm-level change in British capitalism because of how they inform particular BBFOFs. Similarly, Tata’s acquisition of JLR is informed by its sheltered position from stock market pressures, where its independent financial strength enables and facilitates the penetration of upper segment brands and associated new markets by asset-acquiring foreign direct investment. All three BBFOFs demonstrate a lesser dependence on financial markets for investment and a reliance on private sources of capital. Dupuis (2017) confirms these arguments in a study of French auto suppliers where a lesser dependence on financial markets and a greater reliance on private sources of capital reduce financialized pressure to breach implicit contracts with workers which centre on higher road employee participation informed by collective bargaining and open management.

To summarize, in-economy re-shaping such as the emergence of BBFOFs is part of the liberalism of contemporary British capitalism. This creates the space to enable and facilitate the emergence of BBFOFs dominated by new stakeholders which deviate from the short-termism associated with Britishness. BBFOFs which are controlled by ICIs may operate similarly to this or in contradistinction to it where consortium leaders are themselves exposed to – not sheltered from – significant stock market or private equity related investor-owner pressures. It follows from this that ownership in national capitalisms rather than headline varieties of capitalism is in the contemporary period a potential driver of change in British capitalism.

Financial commitment

The established literature reports that firms with widely dispersed ownership patterns, both in terms of nationality and type of investor-owner, are more likely than firms with narrow stakeholder ownership to focus on short-term profits and returning monies to investors (Gospel and Pendleton, 2014: 21; Kay, 2012). Therefore, for BBFOFs the depth of financial commitment is as likely to be influenced by patterns of ownership as country of origin. In NSDFs financial commitment flows from the autonomy that key ownership stakeholders, who control a firm, have from the imperative to raise investment funds from the stock market or leveraged investment funds from unsheltered investors such as hedge funds and private equity funds, which accordingly frequently display investor activism. For example, Tata, a family-controlled conglomerate which acquired JLR in 2008, is in part able to avoid these pressures because of huge cash flows generated by its IT branch – Tata Consultancy Services (Balcet and Ruet, 2011). By association, the depth of financial commitment in stakeholder dominated firms is illustrated by the scale of parent owner shareholding. Here the depth of commitment results from owners using their own money to fund share issues and the re-investment of share dividends back into the firm to support sustainable growth. Bentley is part of the VW group, which has a built-in long-term perspective due to the holding controlled by the Porsche family and the State of Lower Saxony in Germany. So in terms of Lippert et al.’s (2014: 79–83) sheltered–unsheltered spectrum, at VW stakeholder control has adapted to shareholder capitalism to limit management autonomy where profits are now redistributed to investors and managers more than other stakeholders. In contrast to this, at Walgreens Boots Alliance and Travelodge there is virtually no stakeholder control and greater exposure to investor pressures and incentives for managers to secure these returns at the expense of local autonomy.

Bombardier is a wholly autonomous sheltered division of Bombardier Inc. in Canada, whereas both Mini and Rolls-Royce Cars are sheltered within the BMW group where strategic family owners hold 47% of the share issue. As a non-volume producer Rolls-Royce Cars holds an established long-term craft approach to production but when it was British-owned as part of the Vickers conglomerate it suffered from a shallow financial commitment which was realized in its sale to VW and then to BMW. Lastly, JLR too is family controlled and listed in the UK; however, JLR’s holding company is listed in Singapore. The depth of financial commitment in both JLR and Mini is evident in British-based investment in research and development and more significantly in skills formation training and development of substantial apprenticeship programmes in the West Midlands and Oxford. Both firms focus on lean production principles hence work intensification therein remains a key feature of auto manufacturing and is not reduced by new stakeholder ownership. Both dominant stakeholders have however recognized a skills gap in local educational and training provision. To roll out new models, JLR has invested £2.75 billion of its own money on capital expenditure. This investment was supplemented by funds from the national service for apprenticeship training and development in business improvement techniques at NVQ level 2.

We wanted to put 1300 apprentices through the qualification and the approach the firm takes to HR and learning and development is in stark contrast to that of Ford [the former owner] … they attempted to implement Fordist principles reducing quality niches to rely less on lean techniques. (Interview with quality and training manager at JLR)

What this actually meant was a focus on minimum unit cost for all components which inevitably reduces quality to a standard which, the quality manager suggested, was unnecessary in luxury car production where customers are prepared to pay a premium:

It is what goes on under the bonnet that counts not the unit cost of plastic clips. (Quality and training manager at JLR)

The BMW group invests £145 million a year in its British Mini plants and intends to produce 10 models replicating its diversified production method for BMW saloons. The firm operates as a global company where Oxford is the centre of Mini operations, which the firm effectively started from new in 2000 when BMW retained the production rights to the then defunct Mini brand after the sale of Rover to the Phoenix 4 consortium (Bailey et al., 2010). The failure of the Rover acquisition has clearly been a learning process:

The current Mini retains the original transverse four-cylinder front wheel drive engine but is effectively a new build on a chassis and production platform modelled on BMW plants in Munich. This investment in the car and the plant was absent in the abortive attempt to run Rover. (Interview with production manager at Mini)

Variations in financial commitment and ownership structures combine to inform approaches to HRM and employment relations because the presence of a concentrated ownership substantially reduces the effectiveness of investor activism (Brav et al., 2008; Kahan and Rock, 2007). Activist investors who own 20% or less of the equity stake in a listed firm can be outvoted by a larger sheltering stakeholder owner. In contrast, ownership diffusion means that shareholder value driven investors are less likely to be outvoted by an insider stakeholder. Accordingly, investors that expose or unshelter a firm are more able to secure HR strategies appropriate to their business model (Goyer et al., 2016). Similarly, the financial commitment of instrumental investors in ICI-owned firms is likely to be short-term and contingent on the nature of the investment not the nature of the firm being invested in: for example, Travelodge Hotels is exposed to (is unsheltered from) ownership by ICIs under the leadership of Golden Tree Asset Management, a New York based hedge fund which bought the firm when it was in administration:

We secured ownership in exchange for maintaining the business as a going concern, this included a 50% debt write-down which stood at £500 million in return for us injecting £75 million into the business and the closure of 8% of our UK hotels. We will sell-out of the market in three to five years and aim to make a significant return on the investment. (Interview with fund manager)

Golden Tree’s investment is therefore instrumental and committed only to the short-term.

Golden Tree invested £55 million to refurbish hotels in order to compete effectively in the budget hotel market. This represents a short-term turn-around strategy where owners who favour unsheltered status secured all UK Travelodge hotels for less than the debt they had taken on board and less than the debt write-down:

The debt to our investment ratio is 3 so we need to sell out for £325 million plus to make a good return, less if [we] can pass on the debt, before that the cash flow from bookings secures our returns to our investors. (Interview with fund manager)

The management of labour at Travelodge reflects this instrumentalism. Site visits established that once refurbished hotels move to a model of electronic management, which removes the booking transaction and related payment from the premises, front of house staff are limited to four or five employees per shift and cleaning, laundry and maintenance is managed on a contractual outsourced model. Like competitors, Travelodge is experimenting with fully automated check-in systems to further reduce staffing needs. In summary, the model of HR appears professional if contractual but includes few developmental components.

Strategic control

Strategic control over resource allocation in new stakeholder dominated firms means that these investor-owner stakeholders are sheltered from ‘outsider’ activist investors who view the status of their investment in a firm in terms of short-term financial performance over potential exit. In firms dominated by key stakeholders such as JLR and Mini, underpinning financial support and a longer-term approach to organizational integration complement a pattern of strategic control via autonomy. Hence insider strategic control undergirds a longer-term focus on innovative capabilities. The financial commitment offered by Tata and BMW to JLR and Mini secured autonomous research and development programmes in Britain, and the investment in training and development referred to earlier at both firms demonstrates an innovative capability which overrides established features of Britishness.

For BBFOFs controlled by ICIs the model of strategic control is an insider one too, but on the basis not of resource allocation but contractual and financial management of space at BAH and the management of sub-contractors at Thames Water. Both firms are unsheltered, where liquidity is essential to pay down leverage and fund financial returns to investors:

We [BAH] operate the business [Heathrow airport] on 97% capacity which means that all services must operate effectively, but, air traffic control, check-in services, baggage handling, security screening, passport control and in-terminal shopping and food offers all run as separate businesses. We manage and control fewer than 12,000 workers but total employment at Heathrow is 73,000 workers. (Interview with franchise manager at BAH)

Effectively all firms within the ambit of BAH at Heathrow are run as dis-integrated services where BAH is effectively only a brand. These dis-integrated services may operate efficiently but do so in a contractual and franchise mode which limits organizational integration within BAH. There is no BAH HR strategy across Heathrow. Each separate employer has a defined approach to HR resulting in a disparate collection of firm-specific HR policies and strategies. Thames Water too is in effect a lead contractor or project manager:

Thames works with 50 or more contractors and only employs 5000 workers directly, most of these are in call centres not digging up roads. (Interview with contracts manager at Thames Water)

Similarly, Royal Mail provides further insight on changing models of strategic control. Until 2013 when it was 60% privatized, Royal Mail resided wholly in the public sector. In June 2015 the government sold its remaining ownership stake to institutional investors just after Royal Mail announced proposed redundancies. The largest single investor-owner is the Children’s Investment Fund, a highly combative activist investor hedge fund registered in London and New York with an internationalized investment ownership, which controls 6% of the firm. Royal Mail now operates in a globally focused sector where it competes with providers unconstrained by its legacy commitments centred on universal but cost neutral geographical coverage:

We chose to announce 1600 redundancies [in March 2014] just prior to finalizing our first post-privatization financial statement and then when we announced our first dividend we also identified the legacy effects of universal coverage as a major impediment to our global competitiveness. (Senior business manager at Royal Mail)

The Communication Workers Union stated that these announcements breached implicit contracts struck with the firm in 2013, which were premised on a period of sustained industrial peace post-privatization. The breaches witness strategic dis-integration and efforts towards rule-making via lobbying for the removal of constraining legacy effects agreed at the time of privatization. Hence innovation may occur in business strategy, corporate governance and HR following the public listing of previously mutual firms or government-owned businesses (Clark, 2009b) as new investor-owners no longer favour prescribed norms of behaviour such as the public good ethic of Royal Mail which was sheltered by public ownership.

Whilst the stock market does enable firms to raise cash to fund investment in new resources, the emergence of innovative portfolio investors such as hedge funds and private equity funds has changed the dynamics of investment. For these investors the stock market provides liquidity for leverage as they are primarily concerned with short-term financial performance and investment gains rather than longer-term innovation in (portfolio) firms. For unsheltered firms controlled by ICIs, integration and innovation is contained by the performance goals of short-term investors but also the lean characteristics of many of these businesses. By contrast, in BBFOFs controlled by dominant stakeholders aggressive shareholder activism can be contained. For example, in BMW institutional investors are geographically dispersed and divided and only control 40% of the share issue. Similarly, at JLR the Tata family control all the voting shares. In both cases the concentration of share ownership shelters JLR and Mini from the permissive regulatory framework associated with Britishness where the potential threat of hostile takeovers by globally focused investor-owners is ever present. Therein, contemporary evidence from BBFOFs owned by ICIs confirms that the presence of widespread ownership diffusion, much of it financialized, hyper-activates short-term investors in British capitalism to regularly secure implementation of employee downsizing and other more circumspect HR strategies (Goyer et al., 2016).