Comment: John Kay leads the way in war on short-termism

SHORT-TERMISM is not a new problem, but it is a persistent one. The recommendations on the issue by Professor John Kay, published yesterday, aim to change the relationship between companies and investors.

It’s a big ask, but that’s not to say there are no answers.

Few would argue that a change in the system that rewards or punishes short-term over long-term performance is overdue and the Business Secretary Vince Cable promises his response by the end of the year.

But if he can force the required revolution upon an entire industry he will have found the silver bullet that Kay himself admits he cannot produce.

For the duration of the inquiry, which was commissioned in June last year, concerns over pay have never been greater. A series of shareholder rebellions have been prompted by a disconnect between returns on equity and executive rewards, resulting in a few notable boardroom departures. Added to that, the government’s austerity programme has heightened a growing sense of injustice over directors’ pay that has permeated the wider public.

To that extent, Professor Kay’s only challenge was to propose changes that would satisfy public outrage while giving the City and businesses enough leeway to function freely and competitively.

Has he succeeded? That will best be tested by the measures the government chooses to introduce and how effective they prove to be.

Kay calls for a new relationship between investors and companies, not least through collective engagement, Recent surveys suggest this is already beginning to happen and the shareholder spring showed that investors have begun to take their ownership responsibilities more seriously.

A quick and easy change proposed by Kay is to scrap the requirement for companies to provide quarterly earnings updates. This process is time-consuming and costly, absorbing thousands of man-hours that could otherwise be used in more productive work. Some companies have staff working full-time on such processes, beginning work on the next update as soon as the last is published.

Little is likely to change over a period of 12 weeks, but companies are pressurised into showing progress or face being punished by downgrades, share price markdowns and other mechanisms that display the market’s displeasure.

It is classic short-termism. Pleading that a blip in performance makes no difference to long-term prospects is rarely regarded as mitigation for companies that find themselves at the sharp end of an instant reprisal that can damage both corporate and individual reputations.

Nor is this behaviour of any benefit to investors or savers who can see the value of their shareholdings pummelled because of it.

Unfortunately, tackling the core issue of pay-related performance will prove the thorniest and most difficult to resolve as companies will continue to demand control over pay as a key element of strategy.

Executive pay reform is now going through parliament but the Business Secretary chose not to adopt the more aggressive measures proposed such as annual binding votes and the requirement for 75 per cent of shareholders to vote in favour in order to win approval; this in spite of the latter suggestion being recommended by Fidelity, one of the City’s biggest investors.

Perhaps the biggest surprise in Kay’s review is that it makes no calls for further regulation. Fidelity’s latest campaign, expected to kick off this week, is for managers to be measured over a longer period. It is gaining support, suggesting a voluntary approach may have greater success than compulsion.

Arguably, cultural change is best achieved when there is consent, inclination and willingness to do something differently. However, if the voluntary route fails, legislation may offer the only alternative.

How a degree becomes finger-lickin’ good

Sponsored degrees are nothing new, but there will be some surprise that Kentucky Fried Chicken is backing a BA Honours degree in business management by offering to pay half of each student’s fees.

If it helps cash-starved students get to college and companies hire the people they want then let’s have another helping.