Fixing British companies would help to fix broken economy

Grotesque inequality, low productivity, low skills and low wages: The problems of the British economy are deep seated and at the core of a host of societal problems.

But how to fix them? Some really rather good ideas can be found in the latest publication by the Commission on Economic Justice set up by the Institute for Public Policy Research.

They are deserving of a wider audience.

The Commission argues that business is in need of radical reform to force its leaders from their current habit of barely thinking beyond whether they’ll be able to meet City analysts’ forecasts come the next trading statement.

Let’s start with the reason for that: Currently shareholders have primacy in company law, and (in theory) power over the way companies run. They are the main watchdogs when it comes to the way bosses do things.

The trouble is, as the Commission notes, the average length of shareholding has crashed from six years in the 1950s to barely six months now.

With bosses incentivised through fat, short term bonus packages, and lucrative long term schemes that aren’t really long term at all (even after reforms pushed by fund manager Fidelity) is it any wonder that there has been a decline in long term business investment?

Is it any wonder that bosses focus solely on short term financial returns for their short term shareholders?

The Commission’s report also notes that just 25 per cent of finance raised by companies is spent on investment.

That paucity of investment feeds through into the treatment of employees. Instead of spending money on training them, and keeping them happy, so that the employer reaps long term benefits, they are effectively seen by most corporate executives as interchangeable drones. And by most shareholders too.

The only employees they seem to value are executives, whose pay increased by 47 per cent between 2010 and 2017 against just 7 per cent for the average employee.

This is demonstrably against shareholders' economic interests - it hasn't done anything to improve corporate performance. It is a waste of their money, or at least, a waste of the money invested by people like you and me with big asset managers who are our proxies. Because those asset managers mostly only think short term, they are rarely roused to do anything about it with the votes they have.

It is also often not the CEO but the average employee who will first recognise problems within a business. The trouble is that they rarely have the means to raise them, exacerbated by the decline in union membership, and the regressive legislation they have faced.

It would be in investors’ interests for this unhappy situation to change, but, again, too few recognise that. Just pay us the damn dividends already!

Leaving it all to the shareholders is failing British workers and failing Britain. Ultimately is is also failing British businesses and their shareholders too. At least those that aren't hedge funds with a five minute time horizon.

So things need to change.

The Commission suggests that a good place to start would be to bring employees in from the cold, and hand them representation on both company boards and the remuneration committees that set bosses pay. This is common practice, and uncontroversial, on the continent and it serves European businesses rather well (just look at Germany or Sweden).

Not only that, it thinks directors’ duties should be amended to give them the explicit responsibility of promoting the long term success of the companies on whose boards they serve.

It also suggests that a Companies Commission be established to oversee and strengthen standards among both listed and private companies.

What, another commission? Well no. This commission would be a regulatory one, with investigative powers and legal remedies. The use of them might help to restore some of the public’s very limited faith in corporate Britain.

As the Commission notes, reforming corporate governance will not serve as a panacea for fixing the nation’s economic problems.

But, while some of the measures it proposes might not sound terribly exciting (except to governance wonks such as myself), it would certainly help.

Its ideas hold out the tantalising prospect of businesses that are not only fairer but more successful too. Companies like that would serve the interests of shareholders most of all.

So perhaps we should give it a whirl. Its not as if the current model is doing much for anyone, with the notable exception of fatcat CEOs who typically howl and wail when anyone suggests reform.