Tomorrow’s Company, who work with businesses to help them become a force of good in the community, have released the findings from its year-long research project. Tomorrow’s Company looked into the advancements and future prospects of businesses in the UK, and found that the current situation is not working for shareholders or society.
Tomorrow’s Company research highlighted a number of concerns. They included:
The focus on cash returns to shareholders has been self-defeating – Despite an increased focus on shareholder returns, investors have achieved the same return investing in government bonds as they have investing in UK equities. The last time this was the case was during the Great Depression.
Employees are losing out and productivity is poor – Wages are being squeezed. Real wage growth has declined in every decade since the 1970s and in this decade real wages have fallen. Only 49 per cent of people are likely to recommend their company as an employer, and UK labour productivity is 15 per cent below the G7 average.
Long term investment by British business is in a sustained decline – Investment in fixed assets has fallen from 11 per cent of GDP in 1997 to 8 per cent in 2014, below the United States and EU. Investment in R&D is also low at 1.6 per cent of GDP, below the Euro area at 2.1 per cent and United States at 2.8 per cent. This is holding back critical sectors like infrastructure, housing, healthcare and energy.
The lack of investment makes it harder to reduce the government deficit – Over the last few decades, companies have increasingly been net savers in the economy, now to the tune of 7 per cent of GDP, or £100bn. To offset this, the government has had to artificially boost demand. It may have few levers left to pull when the next recession comes. The real answer lies in a renewed focus on the health and the wealth creation capacity of companies.
These problems are most acute in listed companies – These account for 16 per cent of private sector jobs and 47 per cent of investment, and are crucial to future pensions.
Tomorrow’s Company warn that too often these concerns are treated separately, when in fact they are all connected. Encouragingly there is an alternative approach to business success for which there is mounting evidence. This approach recognises that success starts with engaged employees, satisfied customers and stable suppliers, with shareholder returns being the end result and not the starting aim. It is underpinned by a clear purpose and set of values that help guide behaviours, and a long-term view that embraces risk.
Commenting on the findings, Mark Goyder, Founder and CEO of Tomorrow’s Company, said: “It is the perverse outcome that investors get the same return from funding the national debt as they do backing UK companies to grow and invest.
“Our obsession with the short-term has created companies that over-save, under-invest and fail to get the best out of their people. This can change if companies start purposefully investing in the long term. But this will only work if they are held to account by shareholders and boards who are equally focused on long term growth, in a climate reinforced by government policy.”
Tomorrow’s Company makes a number of specific recommendations to make this agenda a reality. They include:
Pension fund and other asset owners should set longer-term mandates for fund managers – at the moment too many pension fund trustees believe they have a fiduciary responsibility to prioritise short term returns. This is not the case.
Fund managers should be incentivised to be better stewards – using their influence to drive long-term growth in companies, rather than outperforming a benchmark.
More in-depth analysis and less “noise” – a greater focus by investment research on culture, innovation and the real drivers of long term shareholder value, supported by a new structure for investment research and broader company disclosure.
The introduction of “Governance plus” – each scandal has increased the focus on compliance at the expense of innovation and risk. Boards need to change this balance, with more director time spent looking closely at the drivers of long-term shareholder value.
A coherent government policy for long-term focused companies – The government has too often taken a passive stance in its approach to British business. Instead, the government could use a range of policy tools to encourage companies to take a longer-term approach, from procurement criteria to bank credit creation to removing the barriers to alternative forms of ownership.
The report points to a number of companies exhibiting a long-term approach, including Admiral Insurance, JCB, Adnams and Unipart.
John Neill CEO of Unipart, said: “The number one strategic challenge facing business and the UK is growth. We need to grow the economy and to do so we need to have enterprises and businesses that create growth opportunities both domestically and globally.
“This means we have to be competitive and innovative, both of which derive from improved productivity. As the report shows, our current track record is not good. It has to change to avoid leaving a dreadful legacy to our children and grandchildren. I therefore highly recommend that business leaders read and consider the recommendations of the report and the Tomorrow’s Company approach. I am convinced it is a superior business model that can help solve many of the problems facing our country today.”