David wrote in The Times about the short-termism of BAE in its decision to end production at the Brough plant. The company has pointed to falling defence orders as the cause of the shutdown. But its heavy investment in once-illegal share buyback schemes- which serve to boost the income of the management whilst doing little to improve the health of the company- would suggest, he writes, that this is not the case.
BAE’s attitude, David says, is all too typical of British manufacturing firms- which would rather seek very short term profits than develop new products and invest in British production.
BAE Systems will hold its annual meeting tomorrow in Westminster, a stone’s throw from where, shortly before Christmas, BAE workers and their families held a mass demonstration against the company’s decision to end aircraft manufacturing at Brough, with the loss of 900 jobs in my constituency.
When BAE shareholders meet, they will have to face those workers, who will be protesting again against these devastating job cuts.
In recent years, Britain’s biggest engineering employer has not covered itself in glory. Not only has it turned its back on its loyal workforce, the company has also taken decisions that characterise some of the reasons that major industry in Britain continues to shrink in favour of offshore production and short-term profit-taking.
When BAE announced its latest layoffs, it blamed falling defence orders. Yet weeks earlier, the company had found a spare £500 million for a share buyback. The previous year, BAE spent £520 million buying back its own shares, making a total of £1.2 billion spent on buybacks in the past two years. Rather than chucking £1 billion around to buy shares in itself, why did BAE not use its cash reserves to develop new products to take advantage of its highly skilled workforce and preserve Britain’s aerospace manufacturing capacity? The answer may lie in the fact that buying back shares allows senior BAE executives to increase their bonuses, which are linked to earnings per share. Companies that buy back their own shares typically then cancel them to increase earnings per share without adding to real profitability.
A Citigroup study found BAE’s management is “indirectly incentivised to continue share buybacks”, adding “buybacks are the easiest and least risky way to boost earnings per share”. This is why buybacks used to be illegal in Britain in the days before financial engineering was fashionable.
BAE says that its executives’ pay is “performance-related and aligned to the interests of shareholders”. But performance can be measured in many ways. A strategy that arithmetically massages earnings per share figures is not always one that benefits the workforce and safeguards the company long term, let alone promotes the national interest.
For instance, BAE falls short of expectations for its investment in research and development. Outstanding German companies such as Bosch spend more than 8 per cent of their revenue on their next generation of products. BAE spends 3 per cent.
Then there is BAE’s breathtakingly myopic decision to sell its shares in Airbus in 2006. Back then, defence sales were strong and civil aviation looked a tough market. Now the opposite is true, BAE has been caught out and its workers are the ones who will suffer.
The truth is that BAE’s decision to slash hundreds of jobs is not merely down to low orders. It is also the symptom of a tendency for some British manufacturers to shift production overseas. The Harrier jump jet, developed with British taxpayers’ money, is now made in the US. Most of the 150 Hawk aircraft ordered by the Indian military in the past decade were assembled in Bangalore, not Britain. Even as it announced the latest job losses, BAE was negotiating a £5 billion contract with the US Government, through which up to 1,000 Hawks would be made in America.
By doing this, BAE is sacrificing tomorrow’s prospects for today’s profits. It is an industrial tragedy. It is also a caricature of the problems that afflict British manufacturing industry today. BAE’s strategy in effect exports the intellectual property commissioned and paid for by British taxpayers. In another age, it would have been called selling the seed corn.
This issue is important to me as an MP, but it is also emblematic of a problem that affects the whole country. Both aerospace and defence are massively important businesses for Britain and BAE is the biggest British company in both industries, so when executives put share buybacks ahead of research and development and investment, the consequences, for workers and for Britain, are severe. If the performance of the executives matched that of the workers, BAE — and British aircraft manufacturing in general — would be better off.