Hamish Mcrae: Politics and business live a world apart

Company managers have to implement policy, whereas ministers do not

The real explanation for the "loans for honours" mini-scandal is that politicians and business people don't understand each other. The currency in which they measure their achievement is different; their career paths are different; the way they spend their working days is different. So it is unsurprising that periodically the relationship between the two comes unstuck.

The point about the honours ructions is that it is one of the least important examples of this chasm of understanding, though an interesting one.

It is very easy to see what has happened. The businessman (in this instance they are all men) would assume he had a deal. If he gave a certain amount of money to the Labour Party he would receive a peerage or a knighthood. The deal would be the same whether it suited the party treasurers to receive the money as a gift or initially as a loan that would at some later date be made into a gift. Of course there is no written document but you shake hands and that is it.

This may seem very casual but actually a huge amount of business is done this way: a discussion between two principals, often in some social setting, that each is bound to deliver on. The details are sorted out by underlings at some later stage: "I'll get my people to talk to your people." But a deal is a deal.

Politicians are not like that. They have an agreement and then change it. A cabinet minister has the full support of the Prime Minister and then is sacked next week. Someone says they won't stand for leader of a party then does. Everyone understands. Everyone goes on dealing with each other.

But then you have to in politics whereas you don't in business. Politicians know they will be cloistered together for years, maybe their whole careers, so they have to get on with each other. But in business the community is so much larger, for many enterprises global, that you can in fair measure pick whom you deal with and on what terms. Having a reputation for not doing what you say carries huge costs. It means that to deal with you other people will, so to speak, want cash up front. This misunderstanding of how business people behave affects politicians of both parties but there is a practical reason why it troubles Labour more. The businessman who was best known to them was Robert Maxwell - several senior Labour people, including Alastair Campbell, actually worked for him. So they assumed that his ethical approach was normal in the business community, whereas actually it was quite unusual.

There are other important differences between the two communities. Longevity is one. The role of chief executive in a large company can become something of a revolving door when things are going wrong but even in companies in trouble, tenure is longer than in most ministerial posts. So a minister can take a decision knowing that it will probably be implemented by the next incumbent, or the next but one.

But while posts change frequently, most policy changes only slowly. A new minister is not allowed to junk all the decisions of the previous one, whereas a new chief executive frequently has to do so. Companies have to respond to competition in the marketplace in a way that governments do not. One of the things that executives find most frustrating in their dealings with government is when government persists in a policy that clearly will not work.

Company managers also have to implement policy, whereas ministers do not. Anyone who has tried to manage anything will appreciate how extraordinarily complex the process is. Knowing when to listen, when to accept failure, when to rely on an intuitive feel and when to rely on the experts - all these things are very difficult.

That is why politicians find management so frustrating. As you can see in the Child Support Agency, the experience with working family tax credits and the recent expansion of the NHS, things don't turn out as planned. The politicians can't quite understand why things don't work. But a good business executive could see immediately that the structures the politicians had allowed to be created were inherently difficult to manage effectively, maybe impossible.

This mutual frustration matters vastly more than the terms under which new peers are created. It does not do huge harm to the country having some people in effect buy their honours. There will be a counter-revolution, with the rules being tightened. Meanwhile the honours themselves are just so slightly devalued. So what?

What matters surely is that the business community has a general confidence in government to carry on investing here rather than elsewhere; and that government has sufficient trust in business to learn how to run better services and make better economic decisions.

On the first, my worm's eye view from talking to people at many different levels of the business community in recent months is that the relationship is much more tense now than it was, say, three years ago.

In finance there is not too much of a problem. There are worries about regulation and some concerns about taxation. But the appreciation that monetary policy is not in the hands of politicians is very supportive of confidence.

The problem is with the wider business community. Oil companies are adult about taxes but feel after the last rise in North Sea taxation that the UK carries a higher level of political risk. Retailers just feel battered. The ones I have spoken with are mostly small and are struggling on several fronts, including rates, staff regulations, the general downward squeeze on prices and the fall-off of consumer demand.

Most interesting are the manufacturers. It is a small sample but the thing they are interested in is what to make abroad and what to carry on making here. Germany is the prime example of companies shifting more and more production offshore, partly because of costs but also because of what is seen as a government unfriendly to business.

And government? The distrust matters because we are at a stage where government will have to trust the business community more. Spending cannot grow much more as a percentage of GDP and in practice the best way to deliver more will be to use the private sector more. But that is hard if you don't understand them. Companies tendering for government work, for their part, have to add in a cushion to compensate for political risk. But that cushion leads to distrust, the sense that government has to overpay, which in fact it does.

In reality, both sides have to learn more about each other. That is the only way forward. It means listening. Management matters more than gongs.