Vince Cable will today launch a review of Britain’s stock markets as the business secretary steps up efforts to end corporate short termism.
Mr Cable has appointed John Kay, an economist and Financial Times columnist, to chair the review, which follows a wider study of corporate governance launched in October.
The business secretary will tell the Association of British Insurers that the financial crisis raised “justifiable concerns” about whether there were “systemic flaws” in the way companies were owned and managed.
Not only were management sometimes incentivised to pursue strategies “not in the long term interest of their shareholders” but they allowed takeovers that destroyed value, he will say. “At times, it seems like the ultimate owners of the assets were powerless to intervene, because of the complexity of the investment chain,” Mr Cable will argue.
The business secretary will insist that the agenda is “pro-business” because it will help business leaders make long-term decisions that are good for theeconomy.
The review follows rising scrutiny of shareholders and their role in the banking crisis and takeovers such as Kraft’s hostile bid for Cadbury.
That acquisition, completed last year, sparked criticism from Lord Mandelson, the former business secretary, who said it was a deal focused on short- term gain. Hedge funds played a pivotal role in allowing Kraft to take over Cadbury. Not long after, the Takeover Panel launched a review of its code.
Shareholders have since drawn up their own Stewardship Code, which sets out best practice for shareholder engagement with the companies they own.
Mr Cable has been vocal about imposing a stricter regime on bids and has argued that short-term speculators should not determine takeovers.
Mr Kay will produce an interim report by the end of the year with a full report due in early 2012. The business department is separately pursuing other issues of corporate governance including pay and takeovers.
Mr Kay said he would examine how equity markets influenced decisions by companies and whether they enhanced the competitiveness and long-term performance of British business. “This is probably the most important issue in industrial policy today,” he said.
Mr Cable told autumn’s Liberal Democrat conference that the review would examine how markets are often “irrational or rigged”.
In that speech he argued that some good companies were “destroyed” by short- term investors looking for a “speculative killing”. He will today make a more subdued case for reviewing equity markets, setting out the broad direction of Mr Kay’s review.
It will address whether equity markets encourage long-term strategy; whether there is enough transparency in the activities of fund managers and companies; whether government policies encourage boards to focus on the long term; and the quality of engagement between institutional investors and companies.
“In particular, we need to examine how the equity investment regime can be recalibrated to support the long term interests of companies, and underlying beneficiaries such as pension fund members,” he will say.