New research suggests that businesses lose out on billions of pounds for one reason: they lack purpose. Fragmented shareholders and compensation contracts based on maximising profits in the short term, prevent companies from making more capital.
Organisations have become ownerless and have lost sight of the purpose of finance – a trend borne out by a financial system that often fails. In Britain and elsewhere, excessive and hidden costs, poorly designed institutions and ill-conceived regulation, hit people’s savings. And it’s not always easy for consumers to understand and access the best financial products for them.
Rediscovering the purpose of finance is essential to addressing the issues affecting organisations and consumers. Our faculty believe shareholder activism where stakeholders help clarify and support the company’s vision can lead to success. Their research also highlights a need to reform financial systems, by making fees for consumers completely transparent, revamping governance and simplifying regulation.
This report by a taskforce of FTSE CEOs, investment houses, leading business schools and business consultancy firms was established by Big Innovation Centre and supported by the Bank of England. It reveals that fragmented shareholder bases, compensation contracts based on short-term profit maximisation, and disclosure policies that emphasize the quantitative at the expense of the qualitative, are holding back companies from creating greater economic and societal value. The report is co-authored by LBS Professor of Finance, Alex Edmans.
Lack of transparency, complexity and excess regulation mean financial services are no more productive than they were 130 years ago – but that could be fixed, two London Business School experts believe.
Inside the financial system
Finance is essential to help us make payments, keep our wealth safe, insure us against risk and get money to where it is needed. But over the last couple of centuries the industry has changed enormously. How well do those changes serve the consumer?
This animation shows why, despite huge advances in technology and a proliferation of professional expertise, the cost of making an investment today is no lower than it was in the 19th century.
Regaining financial purpose
LBS Associate Professor of Accounting Practice, Chris Higson, and Executive Fellow of Finance, David Pitt-Watson, fear that too many who work in financial services have forgotten their true purpose. Pitt-Watson, former head of Hermes Focus Funds, fears the industry has morphed into a self-serving behemoth.
In this film, Pitt-Watson and Higson look for solutions including simple default products and better education and information, enabling consumers to compare and contrast the price and quality of financial products.
Financial Innovation with Thomas Philippon
The productivity revolution of the last century or more, which has transformed most business sectors out of all recognition, has passed one of them by – financial services.
This is the startling conclusion of Thomas Philippon, Professor of Finance at the Stern School of Business, New York University, who explained his findings at a recent London Business School Leading Minds lecture.
David Pitt-Watson and his co-authors explore the implications of this in their book, What They Do With Your Money.
Learn more about Philippon’s research in this film.
What They Do With Your Money
Each year billions are paid in fees to those who run our financial system. The money comes from our bank accounts, our pensions, our borrowing, and often we aren't told that the money has been taken. The cost would be justified if the industry was doing a good job, but it too often fails us.
In discussion with London Business School’s Chris Higson, Stephen Davis, Jon Lukomnik and LBS’s David Pitt-Watson, share insights from their latest book What They Do With Your Money and set out an agenda for a reboot of capitalism.
LBS faculty in the news
- My fight to shield savers from the City pickpockets: Fund manager accuses industry of fleecing investors with hidden fees - 24 August 2016
- Does the finance industry do a good job? - 2 August 2016
- Time to think of pension, not just MPF - 12 July 2016
- Why purpose is critical for long-term success - 5 July 2016
- What is the purpose of finance? - 4 July 2016
- Can fintech go where no IT has gone before? - 1 July 2016
- Will fintech make the world a better place? - 30 June 2016
- Secret agents: a new book argues our finance industry needs reform - 11 June 2016
- David Pitt-Watson, author of What They Do With Your Money - 2 June 2016
- Are company bosses paid too much? - 26 May 2016
- Clear purpose could add £130bn per year to British firm values - 16 May 2016
- Bosses take bigger share of top British firms' profits - 6 May 2016