Short-termism and scandals have dogged the UK economy for decades. This general election is an opportunity for political parties to deal with these problems but only one major party appears to have put forward effective policies to do so.
Shareholders have a short-term interest in companies and expect quick returns. UK companies are paying-out 55 to 60 per cent of their earnings in dividends, the highest amongst developed economies. The UK invests around 17 per cent of its gross domestic product (GDP) in productive assets, far less than other EU countries, and languishes near the bottom of the investment league. Just 1.7 per cent of GDP goes into research and development, far less than other major EU economies. Inevitably, the growth in productivity has stalled.
The other major feature of the UK economy is recurring scandals. The recent list of high profile corporate scandals includes BHS, Carillion, Thomas Cook, Patisserie Valerie, LF Woodford Equity Income Fund, London Capital and Finance. Thousands of people have lost jobs, savings, investment and pension rights. The finance sector has been a serial offender and is routinely involved in mis-selling and other scandals.
Carillion collapsed in January 2018 and its audited accounts included worthless contracts and inflated profits. It borrowed money to pay dividends. Directors continued to collect mega pay packets without any challenge from anyone. Two years later, regulatory reports on accounting/auditing and director conduct are yet to appear.
The UK regulatory apparatus is cumbersome and ineffective. There are over 700 overlapping and uncoordinated regulators. At least 41 deal with the financial sector, and little has been done to resolve the long-running saga of frauds at HBOS and Royal Bank of Scotland (RBS).
There are twenty-five regulators dealing with money laundering and UK is now a global destination of dirty money. Twenty-two of these, mostly trade associations, are outside the scope of the freedom of information law. There are five regulators dealing with accounting/auditing and audit failures continue to make headlines. Even then there is no central enforcer of company law and no one is focused on exorbitant, often undeserved, executive pay.
UK corporate governance needs to be reformed to enable companies to focus on their long-term success. The regulatory apparatus needs to be streamlined to make it efficient, effective and a bulwark for protecting people from malpractices.
Despite public anxieties, the Conservative manifesto contains virtually no proposals for dealing with short-termism, corporate governance, executive pay or regulatory failures. The Conservatives seem content with status-quo, which can neither promote confidence in businesses nor protect people from malpractices.
In sharp contrast, Labour manifesto offers the vision of an economy in which stakeholders cooperate to secure long-term success of companies for everyone’s enrichment and regulators are efficient and accountable.
Just imagine if BHS or Carillion had employees elected directors. They would have challenged the narrow focus on short-term shareholder returns by emphasising the need for long-term investment, jobs, safety of pension schemes and a sustainable business model.
Employee representation on the boards of large companies is common in major European countries and has provided stability and focus on long-term success for the benefit of all stakeholders.
Labour wants to emulate these tried and tested co-operative practices and would require one-third of board seats to be reserved for elected worker-directors. Companies would be able to choose between unitary boards and two-tier board structure, common in Germany and elsewhere. In a shift to stakeholder economy, Labour would require changes to the directors’ duties and has promised to consult widely.
Small shareholders complain that they are overridden by speculators who dive-in to intervene in hostile takeovers and other decisions and then quickly divest. In strengthening the rights of long-term shareholders, Labour mentions practice in France where those holding shares for two years or more enjoy double voting rights.
For executive remuneration, Labour would require greater transparency of executive remuneration arrangements. Remuneration committees would have representatives of employees and other stakeholders. Executive pay would be “subject to an annual binding vote by stakeholders, including shareholders, employees and consumers”. Labour would consult widely on this.
Companies would need to disclose the ratio of total chief executive remuneration to median employee pay. To check fat-cattery, Labour would charge an Excessive Pay Levy on companies: “2.5 per cent for income paid above £300,000; 5 per cent for income paid above £500,000; and 7.5 per cent for income paid above £1m”. This concept is similar to a recent bill proposed in the US by Senator Bernie Sanders and also by Republican senators.
The frequency of scandals in the finance industry draws attention to cultural and regulatory shortcomings. Anthony Stansfeld, Thames Valley Police and Crime Commissioner, secured criminal convictions of six people, including two former HBOS bankers, for frauds.
Thereafter, he was passed from pillar-to-post and concluded: “I am convinced the cover-up goes right up to Cabinet level. And to the top of the City”.
With this background, Labour has promised “a twelve-month independent inquiry into the UK finance sector”. This is very similar to a recent Royal Commission inquiry in Australia which took evidence from stakeholders and corporate executives to expose anti-social practices and paved the way for reforms.
Labour would streamline the regulatory structure and drastically reduce the number of regulators. Unlike the present arrangements, the regulatory apparatus would be independent of government departments and report directly to parliamentary committees. All would be subject to the freedom of information law. Instead of a plethora of uncoordinated regulators, Labour is proposing a Business Commission and series of sub-Commissions underneath it.
For example, a Finance Commission to deal with all aspects of the finance industry; and a Companies Commission to deal with all aspects of company law, including corporate governance, accounting, auditing and insolvency.
A Supervisory Board consisting of stakeholders would exercise oversight of the executives responsible for operations of Commissions, ensuring that people’s concerns are addressed. The structure would be accompanied by an independent enforcement arm and an ombudsman to adjudicate on disputes.
Overall, the Conservatives are committed to doing little whilst Labour offers a vision of corporate governance and regulation that is inclusive, focuses on the long-term success of companies and provides a regulatory architecture that eliminates waste and protects people from malpractices.
Prem Sikka is a professor of accounting and finance at the University of Sheffield