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Shareholder power 'holding back economic growth'

Andy Haldane is the Chief Economist of the Bank of England. In a recent interview with the BBC he expressed his concern that business investment was lower than ‘desirable’ because of ‘short-termism’. He said that in 1970, £10 out of each £100 of profits were typically paid to shareholders through dividends. Today, however, that figure was between £60 and £70. Mr Haldane argued that left far less cash available for growth-boosting re-investment and that firms risked "eating themselves".

Mr Haldane believes that one possible major cause of this short-termism is the nature of UK company law, which gives most decision making power to shareholders. The nature of shareholding has changed over time, the average investor held a share for an average of six years, but that has now fallen to just six months.  This means that the people ultimately charged with making decisions have less interest in the long-term health of companies. Mr Haldane noted that other systems of corporate law gave greater weight to other stakeholders - such as employees and customers - than the UK system. Changing management incentives and the structure of companies to better align incentive for the longer term would be "a good thing".

Mr Haldane has previously argued that incentive structures in banks led to short-term decision making, too much borrowing and ultimately to the international financial crisis of 2008 – which cost the British economy £7.4 trillion according to his figures.  He said that the UK economy was "still healing" rather than back to full health.

Speaking about the longer term growth outlook, he said he saw economic "headwinds" in a "wobbly world" and other factors such as demographic change, the overhang of high debt from the financial crisis and its aftermath and the rise of short-termism could mean economic growth in the future is weaker than in the past.

Figures released by the Office of National Statistics in Sept 2013 showed that over 50% of UK Stock Market shares are owned by ‘rest of the world’ investors - up from 30.7% in 1998. UK individuals owned an estimated 10.7% and pension funds just 4.7%.

Mr Haldane’s arguments for reforms towards ‘inclusive capitalism’ are in line with Labour thinking. Mrs Thatcher’s failed promise of a shareholding democracy, in which everybody had a say in the companies which controlled their lives, did not foresee the effects of global short-termism.

Down in Devon we are all wondering – as George Ezra sang – ‘What you waiting for?’

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published this page in Blog 2015-07-30 19:49:16 +0100

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