First, it sets out the evidence base on the benefits and costs of the current shareholder-centric model of companies. Second, it makes some tentative suggestions for reform which might tackle some of these costs. There are possible remedies on the table. Part of the solution to the shareholder shorttermism problem may come from mobilising and catalysing what is at present a dispersed, and too often disinterested, long-term investor base. The falling share of institutional investors in equity ownership, together with the rise of passive investment strategies, has exacerbated the trend towards “ownerless corporations”. This is a particular problem in the UK, given its relative lack of block shareholding. 55 Under the auspices of the Investment Association, an Investor Forum has been set up following the recommendations of John Kay’s review. 56 And, internationally, an initiative by asset managers called “Focussing Capital on the Long Term” is seeking some of the same objectives. 57 Ultimately, however, it is simply too soon to say whether any of these initiatives will mobilise and catalyse long-term investors sufficiently to exercise leverage over company management in ways which support long-term value creation. A second, complementary strand would be to seek to reinforce and broaden the “purpose” of companies, to better reflect their broader societal role – their role in serving stakeholders plural (employees, customers, clients) as well as shareholders. Some companies have been able to do so voluntarily by defining clearly their societal purpose and sticking with it.
This has been topical recently, with a number of highprofile cases of executives being paid amounts which do not obviously align well with their company’s performance. Some investors have expressed discontent at these pay packages and some have even gone so far as to vote against them. Investors have had their “Say on Pay”. 50 And, as is often the case at this time of year, as the pollen count has picked up there has been talk of a “shareholder spring”. Ultimately, however, these investor votes are binding on neither management nor boards. They are a “Say on Pay”, but not a “Stay on Pay”. With very few exceptions, no differences were made to executive compensation packages as a result of investor action. And the cases of investors actively voting against pay packages have in any case been rather rare. The “shareholder spring” may be as ephemeral as that pollen. Yet high executive pay-outs potentially have implications, adverse ones, for value-creation by companies and thus longer-term returns to investors. Monies paid out to executives are monies not being re-invested in the company, reducing investment in physical and human capital. They also drive a wedge between management and their employees – a wedge that has widened to over 150 times median wages in the UK and over 300 times in the US. 51 That, in turn, erodes social capital. A company, like a country, whose physical and social capital is being eroded is one whose wealth-creation capacity is being impaired.