In the UK tabloid press, UK business secretary Vince Cable briefly became one of the most unpopular politicians in the land. While he should have rested from his labours berating business, he instead turned to an unlikely source of balm. Normally recommended as a sedative – or at least a sleep-inducing remedy – the latest work on the conceptual framework from the global standard-setters suggests common ground.
Cable was pilloried for what was seen as his anti-business rhetoric when speaking at the annual Liberal Democrat Party conference in September. For the tabloid press he was hastening the end of capitalism as we know it. For the broadsheets, he was simply quoting his hero, economist Adam Smith, from the classic work The Wealth of Nations. Cable was, after all, previously an economics lecturer at that sternest of places, Glasgow University.
Cable was protesting about peoples’ fixation on the short-term. “I am shining a harsh light into the murky world of corporate behaviour,” he told his supporters. “Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors sometimes forget their wider duties when a cheque is waved before them?”
A week later, the first section of the conceptual framework for global accounting standards was published. It too, in its final form, has moved more towards the long term. It has been a long and tortuous process for both the International Accounting Standards Board and the Financial Accounting Standards Board. What we have now is only the first two chapters. But they might stir Vince Cable’s heart. And they should certainly encourage a greater focus on the long term in the world of corporate governance.
For a start, the concept of stewardship is back, though not in the form you might have expected. The difficulties of operating in the global village, one which speaks with many tongues, is cited as the excuse. “The chapter now describes what stewardship encapsulates,” the background material says, and by way of explanation: “We did not use the term stewardship because of ambiguities introduced when translating it into other languages.”
But it is there. The objective of financial reporting is, as you or I might say, to hold people accountable for the capital invested in the business. Stewardship is all about protecting the company.
And if you combine this idea with the provisions in the Companies Act, you have powerful pressure for the shift to the long term. Under Section 172 there is the duty to promote the success of the company. This is not about going for a swift sale. It is about running a company for the benefit of its members as a whole; it is about the likely consequences of decisions when viewed from the perspective of the long term. It is about fostering the company’s business relationship with its suppliers. It is about the interests of the company’s employees.
All of this changes the focus. All of these issues are the ones that you have to think about if you are looking to a concept of long-term success. It is about building the ability of a company to withstand short-term shocks and knocks.
And all of this, as Vince Cable will be cheered to hear, is likely to receive ever more substantial support. Narrative reporting, which strengthens the long-term view, is likely to receive further boosts as reports advocating its enhancement rollout of various bodies in the next few months.
The Financial Reporting Council is due to report on the lessons which should be learned from the financial crisis. And the likelihood is that it, too, will advocate a more sensible approach to liquidity and long-term capital.
Sustainability in its widest form is gaining greater support as a concept to be concentrated upon. The future is not about the short term. It is all about the capital structures of businesses and their operating capacity. And that should be a long-term view.
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