The short term myopia of equity markets
March 30, 2013
We live, now more than ever before, in a world made of markets. How do they work? Why do they work? Why are they better than alternative systems of organizing economics? And why, sometimes, do they fail so catastrophically? These questions are asked of Economist John Kay.
In the Kay report on equity markets he makes recommendations that there should be a much needed shift in the culture of the stock market. It includes restoring relationships built on long term trust and confidence, and realigning incentives across the investment eco-system. British business must invest and must develop its capacity for innovation, its brands and reputations, and the skills of its workforce. Only in this way can we create and sustain the competitive advantages in global markets which are necessary to maintain our prosperity. Through success in world markets British companies will earn the returns on investment which are necessary pay our pensions and enable us to achieve our long-term financial goals.
But currently short-termism results in business may be characterised both as a tendency to under-investment, whether in physical assets or in intangibles such as product development, employee skills and reputation with
customers, and as hyperactive behaviour by executives whose corporate strategy focuses on restructuring, financial re-engineering or mergers and acquisitions at the expense of developing the fundamental operational capabilities of the business.
Kay sets out his recommendations
- Improve the incentives and quality of engagement, such as establishing an Investor Forum to foster more effective collective engagement by investors with UK companies.
- Restore relationships of trust and confidence in the investment chain, including by applying fiduciary standards more widely within the investment chain.
- Change the culture of market participants, including by adoption of ‘good practice statements’ by company directors, asset managers and asset holders that promote a more expansive form of stewardship and long-term decision making.
- Realign incentives by better relating directors’ remuneration to long-term sustainable business performance and better aligning asset managers’ remuneration to the interests of their clients.