The UK’s leading business groups have called on the government to encourage investors to take a longer-term view on the companies in which they buy shares, rather than produce further corporate governance reviews and more regulation.
In response to business secretary Vince Cable’s review into corporate governance and economic short-termism – A Long-Term Focus for Corporate Britain: A Call for Evidence – which closed in mid-January, the Institute of Directors (IoD) and the Confederation of British Industry (CBI), two of the UK’s largest and most influential business lobby groups, say that companies will need stronger long-term engagement with investors to achieve better corporate governance.
Cable’s review aims to establish whether the system that businesses and their shareholders use to interact promotes long-term economic growth – or undermines it – by debating the role that investors play as well as the length of their investments. According to Cable, short-termism and shareholder disengagement are a growing problem for the economy, which would benefit more if shareholders acted like long-term owners.
Fearing that further regulatory measures from the government might be on the cards – in the last year, there have been changes to the UK Corporate Governance Code and a UK Stewardship Code was introduced – the IoD argues the short-term pressures facing companies are best addressed by improving boards voluntarily rather than through regulatory changes.
According to the IoD, the best way to do this is for the government to concentrate on fostering a better investment climate in the UK by helping businesses to create jobs, while the CBI suggests that the government should reduce regulation and change some of the country’s more “onerous” tax and accounting rules.
In its submission, the CBI outlines a mix of ideas that will encourage long-term equity ownership – such as re-examining solvency and other accounting rules that currently discourage ownership at certain points in the economic cycle – as well as establishing a level playing field for equity ownership and progressively rewarding long-term investment in shares.
“The corporation tax system must not treat ownership of equities unfairly. The long-term ownership of shares is a good thing and the tax system should go with the grain to do that,” says Matthew Fell, the CBI’s director of competitive markets.
This may sound a bit vague, but Fell claims that the guidance is deliberately not prescriptive. When pressed to give an example of how it might work, he suggests “having a tapering system on the dividends of equities held over a long period of time”, so the tax burden on dividends reduces over the length of time equities are held.
Fell also criticises solvency rules around pension funds that support rebalancing funds’ equity/bond split in favour of bonds, rather than buying equities at the bottom of the financial cycle.
“That is in opposition to investors who generally want to stack up on equities,” says Fell. “Rules around that can act as a disincentive to holding long-term equities.”
The IoD believes that boards need to actively attract shareholders that share a long-term vision and investment return period with the company. This is more likely to be the case if shareholders fully understand and appreciate the company’s strategy and key performance indicators.
“There is no optimal or ideal time horizon – it depends on the activities of the company. In pharmaceuticals, there is a very long-term time horizon to get a return on your investment,” Roger Barker, the IoD’s head of corporate governance, tells Financial Director. “Primarily, you must aim to communicate the business strategy in a very transparent way to the market and to potential investors that share those values and that approach.”