At the same time as companies have been investing less, they are handing more of their cash to shareholders. Dividend payments by UK companies were almost £95 billion in 2017, up 10% on the previous year, and the latest in a string of record highs.
On a narrow reading of corporate duties and responsibilities, dividends are reasonably defensible: it is, after all, the shareholders’ money.
Much harder to defend are the share buybacks mentioned in that Conservative manifesto – surely the first time any major party referred to a relatively obscure and technical bit of financial engineering.
Buybacks, where companies use their own cash to buy their own shares on the open market, are economically inexplicable. But if you’re an executive whose remuneration package is linked to earnings per share, they’re good business, because by reducing the number of shares in circulation you bump up EPS and make yourself rich(er).
And they’re on the rise, as Charlotte Pickles explained here last month with devastating precision. Recent research from Deloitte nicely charts the trends in buybacks and investment.
What’s the answer? A lot of people talk about reporting rules, the fiduciary hoops that CEOs must jump through to keep markets and investors informed and content. Chasing good numbers for quarterly reports prevents executives taking a longer view, it is said.
After John Kay’s characteristically incisive report for the Coalition Government in 20123, the Financial Conduct Authority (FCA) stopped mandatory quarterly reporting in 2014.
UK companies have duly started to move away from quarterly reporting: firms such as National Grid and Aviva led the way, and now 40 of the FTSE do not issue full reports every three months. In the FTSE-250, more than half have abandoned quarterly reporting. An end to short-termism? This battle is far from done. Work by Suresh Nallareddy and others at Oxford University questions whether a change in reporting periods alone can significantly alter corporate behaviour.
They found no clear evidence that moving away from quarterly reporting led to an increase in investment.
There is, then, still much to be done to persuade the people running big companies to think about more than EPS and annual profits.
Some of the answers will surely be found in other parts of the Kay Report, which also called for real change in executive pay deals, suggesting that much of the huge wealth bestowed on CEOs be locked away from them for years after their departure: that might create a real incentive to plan for the firm’s long term interests.
“Corporate social responsibility” has become a discredited PR wheeze
-
Of course, few will easily sacrifice today’s pay arrangements, so here’s a suggestion that might offer a small incentive: let them keep their jobs for longer. PWC last year found that the average
UK CEOs spend just 4.8 years in the job – that’s nearly halved since 2010. British bosses survive for roughly half the time of their American counterparts.
Breaking the curse of short-termism will require countless changes, not least in culture: “corporate social responsibility” has become a discredited PR wheeze that must sooner or later be replaced by an understanding that without a genuine sense of social duty, business will not just create its own gravediggers, it will ensure they get elected too.
But as a first step on that journey, start with CEO pay and tenure, which should be lower and longer.
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
Subscribe