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Putting Shareholders First Does Not Serve Shareholders, Society or Our Economy

12/05/2016 11:53

There is rising disenchantment with the status quo. People sense that the economy serves the few not the many. Alongside this the UK government is struggling to grow the economy while cutting the deficit. This is being caused by a short-term business approach that is not working for shareholders or society, and therefore the answer will not come from politicians, but businesses adopting a different approach.
 
Companies in the UK, despite considerable success in many areas, suffer from under-investment, low productivity, low real wage growth, low employee engagement and low public support. The irony is that the returns to shareholders have also been poor. The 20-year real return on UK equities is now the same as government bonds, not seen since the 1920s and 30s.
 
The current approach is not only failing our companies, but is also distorting our economy. Over the last few decades, companies have increasingly been net savers in the economy, now to the tune of 7% of GDP, or £100bn, before dividends and buybacks. To offset this, the government has had to artificially boost demand, running larger deficits, cutting interest rates and quantitative easing. But it is now running out of policy levers, and may have few left to pull when the next recession comes. The route deficit reduction needs to include companies spending and investing more.
 
The lack of investment is captured by the example of the UK housebuilding industry. In the UK there is a well-recognised housing shortage, and yet last year the three largest housebuilders returned £840m to shareholders in dividends and buybacks. This is despite running healthy margins and returns on investment. It is a gross misallocation of capital if our largest companies do not undertake profitable investments to tackle societal problems. This is driven by the misguided desire to return cash to shareholders irrespective of investment opportunities.
 
Too often these concerns are treated separately, when in fact they are all connected. And underpinning each of these challenges is an obsession with the short term which is damaging company performance. Encouragingly there is an alternative approach to business success for which there is mounting evidence and examples. This approach recognises that people are emotional beings not calculating machines; that more success flows from effective relationships than from impersonal transactions; and that to achieve something great takes time, which in turn involves risk. It starts with a focus on happy employees, satisfied customers and stable suppliers; with shareholder returns being the end result, not the starting aim.
 
Examples of this approach are companies such as JCB and Jaguar Land Rover who have bucked the trend of declining UK manufacturing by investing for the long term. Unipart with a focus on equipping employees to be entrepreneurial and collaborative supplier relationships. Admiral Insurance with a focus on employee happiness.
 
In its new report, UK Business: What's wrong? What's next? Tomorrow's Company argues that encouraging adoption of this approach will be critical to tackling many of the issues we face as a society. Too often we look to politicians for the answers, when it is companies that create wealth, jobs and solve many of our problems.
 
We need to encourage business leaders to invest in tackling the big challenges we face and through this to inspire employees and gain the public's trust. Boardrooms to embrace risk and encourage entrepreneurial leadership, raising their sights beyond compliance and risk mitigation. Investors to focus on long-term value creation in companies, rather than outperformance versus a benchmark. And lastly, the government to adopt a coherent policy that encourages and incentivises companies to focus on the long term, rather than reinforcing the short-term focus.

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