So in the past couple of posts I’ve touched on my belief that the UK economy is not in a good place right now; that the retrenchment policies of the government have set the economy on a u-turn back into recession and that understandably consumer and business confidence is in the doldrums – and diminishing further*.
There are however, some glimmers of hope.
The Business Secretary Vince Cable has in recent months initiated a number of consultations into the various aspects of corporate governance that lead to economic short-termism; and Commissioner Barnier has indicated his desire to look at the same issues at an EU level. Added to this the Prime Minister tasked Lord Davies to investigate the barriers to women’s representation in the nation’s Boardrooms, and the creation of the Green Investment Bank will be going ahead.
I intend to cover some of these in more enlightening detail at a later date, but for now, I shall I shall say that:
Post “crisis” policy makers nationally and internationally are beginning to look past the initial resolution regimes and emergency measures, and turning their attention sharply to corporate governance. The major theme emanating from the EU Commission and UK Government is a desire to tackle the wide spread focus on short-termism, at the expense of paying attention to longer term fault lines. This is welcome and long overdue. It is to my mind crazy that there has been so little debate about the true underlying causes of the crisis, and how we should re-assess the way capitalism functions going forward. Instead a childish blame game has taken place, leaving little room for a grown up debate.
Most key figures within the investor world would accept, at least in private, that they did not do a good enough fiduciary job pre-crisis. Pension funds and institutional investors did not adequately fulfill their stewardship duties. While they were certainly not at fault for the crisis, their lack of engagement and active stewardship certainly allowed dangerous reckless practices to un-checked – as did the complicit actions of the ratings agencies, the ineptness of the regulators and the greed of the banks themselves.
To simply blame the investor community would however, be unfair. What needs assessing is the whole supply chain of capital, and the numerous conflicts of interest that lie therein. At present all actors are incentivised to favour short-term profits over long-term value return.
Currently the UK government are moving the deckchairs around the regulatory ship and are cutting left, right, centre and every other way possible, in order not to “burden future generations with debt”. However, by doing this they are diminishing the ability of future generations to continue to meet their own needs. The asset side of the UK balance sheet will be weaker and the burden of a lost generation will take another generation to set right.
The proper review of economic short-termism can help. If solutions are adopted correctly, then capital will more efficiently be allocated to where it will truly add long-term value to the economy. Externalities such as environmental damage will be accounted for, and capital markets can become, as they should be, the primary facilitators of a global green and just economy.
That said, I do not hold out much hope for radical change to arrive anytime soon. The Business Secretary has been effectively neutered over recent months; the Chancellor has shown no appetite for such a philosophical approach; and any real change would need to taken in conjunction with international partners. As the battle over the Green Investment Bank (to be discussed next) shows, the Treasury’s conservative mentality is winning out to the detriment of us all, and more important future generations.
So for the present, my optimism remains in check.
* EU wide research has indicated that optimism in the economic outlook has declined significantly more in the UK than in any other part of Europe or in the US (with the exception of Ireland).
