Britain needs investors for the long term

The debate on how best to align the interests of owners and managers of publicly listed companies goes back a long way. With the discrediting of state planning and ownership in the 1980s, the stage was set for the rise of market discipline as a check on management and a guarantee of economic dynamism. After the banking crisis, it is worth asking how this approach has fared.

In many respects the answer is a positive one. A culture of widespread, professionally managed share ownership is a vital source of capital for productive investment. Diversified, professionally managed funds enable us to spread risk and invest far beyond our personal expertise. London’s ability to attract and move capital from across the economy and around the world is one of the UK’s great strengths.

But these strengths can also be a weakness. Liquid markets can create an imperative to trade on the limited timeframes of quarterly results and short-term share prices. Diversification and expert management can create a chain of share ownership in which actual share owners have no long-term sense of the interests of the companies in which they have a stake. Almost everyone who has a pension is in this position.

Modern share ownership can at times walk a fine line between a long-term investment in a real asset and a short-term investment in a financial asset. Market analysts can be as likely to be involved in a sophisticated game of predicting short-term share price movement. It can create a kind of financial abstraction – detaching a financial asset from the real assets and risks it represents. That was, we should remember, one of the key problems with the banking crisis.

On Thursday I am holding a roundtable discussion with senior investors, fund managers, company chairmen and chief executives to ask if London can set a new standard for high-quality, long term engagement between investors and company directors.

The question we need to ask now is how good this model is at building companies with the patient capital required for low-carbon innovation, infrastructure investment and developing new technologies in Britain. We are serious about creating the right long-term incentives in pay. So we also need to think about the way in which the expectations of owners can create perverse incentives.

In recent years the UK government has carried out a number of significant reforms to the corporate governance regime to encourage the right kind of long-termism among company directors. We need an equivalent focus on the long term among company owners, especially those represented by institutional shareholders, who should naturally take a long-term view.

The challenge is to find the right balance between the benefits of trading and the benefits of long-term ownership. Long-termism cannot mean complacency. If we are serious about a strong record of company creation and sustainable company growth in Britain, especially in advanced manufacturing and other industries, we need investors willing to take the long view even while they hold management to account.

Reviews of corporate governance by Sir Christopher Hogg and Sir David Walker have started to pose the right questions about getting the right balance between the short and long term. The UK’s new Stewardship Code, on which the Financial Reporting Council is about to consult, must address them.

A healthy approach to mergers and acquisitions needs to reflect the same commitment to good management in both the long and short term. Nobody denies that a change of ownership can be a good thing for a company. There can be economies of scale or the possibility of technology synergies. It can create new value over time.

But the open secret of the past two decades is that through poor valuation or aggressive cost-cutting, too many mergers fail to create additional long-term value in the merged company. For this reason, companies making acquisitions should set out an objective analysis of the potential gains and be entirely open about their intentions for the workforce, while shareholders on both sides have to be genuinely critical.

Directors should expect to run the gauntlet of public and shareholder criticism if they have done their homework poorly, plan to load companies with heavy debt, are motivated chiefly by the desire to strip assets or simply want make a quick profit off the share price with little respect for the workforce or local interests.

Free-market true believers will no doubt say that any distinction between types of share ownership in publicly owned companies is irrelevant. Most people buy a stake in a business to make money, and they will take a short-term profit over long-term investment. It is not at all clear this must be the case.

It was Keynes who first likened share trading to the superficiality of trying to guess the outcome of a beauty pageant. Britain’s industrial future depends on it being something more than that. It is time to restart the debate.

Lord Mandelson is Britain’s secretary of state for business