On Monday, the government will publish its final response to the Kay Review, which looked at how we can get financial markets to work better for the long-term. Although the debate about promoting long-termism is far broader than the review, the time is right to take a closer look at whether companies feel the policy conversation is on the right track.
Let’s start with why we believe long-termism is important. As the UK’s economic recovery continues to improve, we must make sure that it is sustainable (especially given increasing external geopolitical pressures), and that companies and their investors are able to tackle the long-term challenges we face: forging a future economy which unleashes the potential to invent, invest, export and expand.
If we are to tackle these challenges head-on, we need a regulatory environment that supports long-term decision making by companies and their shareholders. Businesses recognise they will be held accountable when it comes to how they achieve long-term success, and issues like executive pay packages and environmental management can have an impact on how they operate.
But it is important that the regulatory environment, as well as the discussions between companies and shareholders, focus on meeting these long-term challenges, so that companies can continue creating jobs and contributing to economic growth over time.
To achieve this, there are a few things we need to get right. Let’s start with what we should do more of. New rules increasing transparency between companies and their shareholders have been helpful, particularly the greater emphasis on tackling environmental, social and governance questions that are crucial to future success.
Taken together with the newly established Investor Forum, this can help strengthen engagement on these longer-term issues.
We also need to get the discussions between companies and investors beyond the once-a-year annual general meeting (AGM). Both parties tell us that the best type of engagements are regular one-to-one conversations.
Some want to see a move away from focusing on the traditional AGM – which is, in many cases, process-driven and sometimes pressurised – by introducing a separate, strategy AGM. This is certainly worth consideration, alongside other proposals.
Companies are telling us that they are ready to up the dial on strategic engagement, with investor conversations focusing on all aspects of the long-term challenges. On executive pay, for example, the new “say on pay” voting rights for shareholders are a welcome change. It’s absolutely right that shareholders should be involved, and discussions between firms and their investors on pay show that the system is working.
But shareholder engagement on pay is not the be all and end all. We want businesses to consider the challenges they will face in the long-run, and how they’ll address them. They need investors to help with this. The conversation should be about sound risk management, sustainable business strategies, and robust succession planning.
Finally, we need to see long-termism prioritised across the whole investment chain. The process isn’t just a simple conversation between investor and company. Rather, it involves a chain of intermediaries – and there are plenty of other parties involved before a deal is done.
If we want to change behaviours in equity markets, and the interaction between companies and their owners, policies must avoid a piecemeal approach that only captures parts of that conversation. They must tackle the entire chain. Otherwise, we risk outcomes that are based on Chinese whispers, and have no chance of improving things.
There are also areas where we can look to tilt the debate. One area is avoiding a simplistic approach to time-horizons. Too often, political rhetoric pits “long-term” against “short-term”, portraying everything that is short-term as harmful.
Long-term will mean different things for different companies in equity markets, depending on the sector you’re in. Liquidity is also a key factor for firms in identifying the right finance and shareholder mix for their business.
The discussion about long-termism might seem like a dry and abstract corporate governance debate, but jobs and growth are at stake. Long-term business success is critical to securing a sustainable recovery in the UK, and shareholders have a vital role to play in helping steer companies in the right direction.
What’s important is constructive engagement – even on the hard-to-address long-term problems. Not just on those that grab the headlines.