16 May 2016
Report finds fragmented shareholders and short termism hold us back
A London Business School professor of finance has co-authored a major report published today, which 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, published today by a taskforce of FTSE CEOs, Investment Houses, leading Business Schools and Business Consultancy Firms, established by Big Innovation Centre and supported by the Bank of England, stated that if the pursuit of ‘visionary purpose’ is put at the heart of British business an additional £130 billion a year could be added to British company values.
Alex Edmans, Professor of Finance, London Business School, and a co-author of the report, says: "Traditional companies will only invest if they can calculate a tangible benefit. But, in the modern firm, the most important assets are intangible, such as corporate culture, brand strength, and innovation. Only purposeful companies, freed from the exclusive focus on short-term profit maximisation, will make the long-term investments required to succeed in today's economy. In the long-run, there is no trade-off between purpose and profit."
The report finds that:
• Purpose is key to corporate and economic success. Great companies are enabled by the pursuit of a clearly defined visionary corporate purpose which sets out how the company will better peoples’ lives.
• British companies are currently inadequately organised to unite clear corporate purposes with the common goals and values of their stakeholders. The economic costs of this are huge, potentially exceeding £130 billion a year.
• Companies that foster company purposes are proven to innovate, invest, serve customers and engage employees better than those that do not.
• The British business ecosystem currently works against the creation of purposeful companies with its fragmented, diversified shareholder base and a legal and regulatory system that imposes short-term profit maximisation on company boards.
• Financial markets systematically underestimate the value of investments that purposeful companies make in the ‘intangibles’ of know-how, R&D and skills. This is an important reason for the rise in de-listings and decline in initial public offerings.
• With the inexorable rise in intangibles in the 21st century, Britain risks becoming an economic backwater if it does not foster purposeful companies.
Will Hutton, Chair of Big Innovation Centre Steering Group, Taskforce member and Principal of Hertford College Oxford said: “In my view this is the best attempt yet to set out the evidence that Britain has had a lackadaisical approach to company ownership, so carelessly creating economically and morally damaging company ethics and practices. Putting it right is feasible if a consensus can be built for change. I hope this report will contribute to doing just that.”
Options for reform encompass corporate law, corporate governance; executive remuneration; equity ownership; shareholder engagement; disclosure; new auditing principles and taxation.
The Big Innovation Centre’s Purposeful Company Taskforce will be inviting reaction over the next six weeks to over 20 policy options before publishing the Final Report in autumn 2016 with full policy recommendations and a programme for change.
Commenting on the report, Andy Haldane, Chief Economist of the Bank of England said: “the evidence assembled in this report points the way to rethinking and re-orienting the very purpose of a modern day company, so laying the foundation for a new wave of investment and innovation”.