The Business World: Growing big in Britain brings its problems

"THE CHAMPAGNE glass economy" was the phrase used at last week's CBI dinner by its president, Sir Clive Thompson, to describe the state of corporate UK. "Not unfortunately," he continued, " a champagne economy but an economy the shape of a champagne glass."

I'm not sure in which sort of glass Sir Clive likes his champagne - the tall thin sort or the wide flat ones - but his thesis was clear. He divided company life into five ages. First came the infant phase when they were starting up; then the youth phase where they may remain small and successful but also have the potential to develop into large national or global organisations; third was middle age where there was fierce competition; fourth was the mid-life crisis when companies merged and reorganised to take each other over; and fifth, which might be reached if the outcome of the fourth was unsatisfactory, was decline and death.

He argued that Britain had plenty of companies in stage one and a good number in stages three and four. Most of those in five had been swept away in the 1980s. But the problem was the dearth of companies in stage two. We did not build our small businesses into world class players. Though we were better placed than Europe in this regard we were unlike America, which was tremendously successful at this. Most people would agree with Sir Clive. A few British companies have leapt to world-class status in the last few years, but not many. With the exception of Vodaphone, most companies - even those with great technology - have remained quite small. Why?

Sir Clive noted the problems of regulation but his explanation was basically cultural. In America, when he talked with small businessmen, they talked about their business and how to improve it. Here they talked about how to get out with the minimum tax charge and spend money on other things. Here building a business was not an end in itself as it was in the States; it was the means by which the individual could do what he really wanted to.

That is certainly a good starting point. But, like an onion, behind this "why?" there is another: "Why are we culturally different? Why are people satisfied with relatively modest success when they could achieve more?"

I suppose a short answer would be that our business people tend to want well-balanced, rounded lives, and are not consumed by one over-riding interest. I suppose, too, that we live in a climate where commercial achievement sometimes attracts jealousy. We have business heroes, usually of a slightly unlikely fashion - Richard Branson, Sir John Harvey Jones - but we also pillory businesses that are thought to be too profitable. Look at the way BT's profits were criticised in the press last week. Even ahead of publication of its results, Railtrack's profits were already being attacked by the deputy prime minister's newly-appointed regulator. Both those companies were formerly part of the public sector and have a monopoly or near-monopoly on their business. But the climate where government encourages stories of "the scandal of millions of pounds a day profits" is a climate where many wise entrepreneurs will chose to remain small enough to stay out of the public eye. Look at public criticism of high executive salaries, encouraged again by some members of the Government. Being big brings problems.

Saying that there is a cultural problem, however, is not much of a guide to practical action. In any case, cultures change, and the UK has certainly changed dramatically in the last 20 years in its attitudes to wealth creation. So the most hopeful line of attack is to tackle the practical impediments that stop smaller companies becoming giants rather than worry about cultural factors over which there is little control.

Any action plan should probably start with taxation: we have the highest level of capital gains tax in the EU, and we also have high inheritance tax which can only be avoided by passing on assets well before death. These place great pressure on people who have built up businesses to sell in the most tax-efficient way, then move offshore for a few years to protect the wealth for their children. Next, regulation: there are numerous loopholes for smaller businesses, designed to encourage people to start up on their own. That is fine. But exceptions designed to help small companies are exemptions designed to keep them from becoming big. Lots of business people deliberately hold down the size of their business because there is no personal gain from becoming bigger - they have all the money they need - and growth will mean more regulation as well as higher tax charges. On paper the regulatory burden may not appear enormous, but for many people running businesses it is peculiarly irritating. Avoiding irritation may not be a good reason for failing to grow faster, but it is a good excuse.

Third, access to capital: what entrepreneurs need is flexibility to raise capital and/or to broaden their own holdings of assets. In particular they need the ability to sell relatively small chunks of their business at the time that suits them, rather than having to make a single once- and-for-all sale either by floating or selling to a larger company. AIM, the stock exchange's small company market, hasn't really been as successful as many had hoped. Contrast this not just with US practice but also with German, for Germany has also been much more forward-looking in developing a smaller companies' securities market than the UK.

There is perhaps something else that can be done by the policy-makers. While there is no magic wand that will suddenly enlarge the number of firms in Sir Clive's youth phase, this government's genius for presentation might be harnessed in support of smallish companies pondering the opportunities of growth.

It is for government ministers to consider every action they take with relevance to business - in taxation and regulation, of course, but perhaps especially in public utterances - and ask whether it might discourage just one entrepreneur from trying to grow his or her business. And if the answer is yes, then think of something else to do, or say, instead.

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