Investment Association publishes action plan to boost the UK economy and end short-termism

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24 Mar, 2016

The Investment Association (IA) has published an industry-wide Productivity Action Plan to boost the UK economy through long-term investment and end short-termism. The report is “the result of a six month review of the role of the investment industry in supporting productivity improvements with long-term investment”.

The plan, which consists of five principles, indicates how the investment industry can “play its part” and contribute to productivity improvements with long-term investment.  Each objective is underpinned by a series of recommendations and measureable actions to achieve these.  The five investor productivity principles are:

Enhance company reporting for efficient capital allocation: through investment and analytical expertise, the investment industry will seek to identify and finance those companies contributing productive growth in the economy.

Enhance investor stewardship and engagement: the investment industry will engage with companies to help them achieve sustainable value creation over the long term and support investments in improved productivity.

Simplify behavioural incentives and the investment chain: the investment industry will work to ensure that the agreed incentives and governance of the investment chain ensure a clear alignment with clients’ long-term investment objectives.

Develop efficient and diverse capital markets: as key capital market participants, the investment industry has a key role in the development of asset classes and the efficient functioning of capital markets.

Overcome tax and regulatory impediments to the provision of long-term finance: the investment industry should contribute to the debate on the tax and regulatory impediments to investment so as to ensure the right long-term outcomes for clients.

The report highlights a number of shortcomings in company reporting that “significantly impede the ability of investors to understand, and support, a company’s long-term strategy and capital investments”.  Without this understanding, the report indicates that investors will not be able to focus investment on those companies which are focusing on the longer-term and are not able to allocate capital efficiently.  The report says:

The analysis of the annual report is a fundamental part of the investor’s research process.  However, they have significant concerns over how companies are reporting on their long-term strategy and capital management.  While investors set out to assess a company’s likely return on invested capital, and understand how the overall balance of expenditures will support productivity over the long term, senior portfolio managers reported that this is very difficult in practice

Highlights in the report include:

  • Quarterly reporting is seen as a “distraction that shifted company resources away from longer-term strategic considerations”.  The Action Plan expresses concern that “quarterly reporting can distort management behaviour by channelling its focus on short-term fluctuations in performance, resulting in the risk of senior management increasingly focusing on managing the market rather than the business”.  The report cites examples where management has delayed investment in R&D and capex if they believe it will stop them achieving short term performance targets and meeting market guidance.  The IA would “like to see companies move away” from quarterly reporting “in favour of long-term metrics”.   The IA intends to publish a position statement calling for companies to cease quarterly reporting.  Any companies that continue to reporting quarterly will be asked to explain why they do so and how it is relevant to their long-term strategy.
  • There is a lack of clarity on a company’s management of capital.  Disclosures do not allow investors to assess the effectiveness of capital allocation strategies.  The measurement of return on invested capital is “difficult” and there is no articulation of the company’s overall capital management policy and practice.  Investors would welcome more meaningful commentary on future expenditure plans, how these will improve the business and how the plans are linked to strategy and will support productivity over the long-term.  To address this the report indicates that the IA will develop proposals for the articulation and measurement of the long-term drivers of productivity and key performance indicators.  The IA will issue Long-Term Reporting Guidance which will set out investors’ views on how to re-focus reporting on the longer-term strategic drivers of performance.
  • There is insufficient reporting on human capital management.  The report indicates that “a key driver of improving corporate productivity is a company’s workforce and whether the workforce is deployed efficiently, including the development of skills and competencies”.  Investors would like to see reporting on how a company manages its workforce into their investment decision-making process.  Without this, “an important factor for improving company productivity is neither being reported on by companies nor sufficiently integrated into analysis by investors”.  The IA has indicated that it will work with other stakeholders to outline the approach to company reporting of human capital management which would be most beneficial to investors.

Additionally the report looks at enhancing investor stewardship and engagement.  It indicates that there continues to be a disproportionate amount of engagement time spent on executive remuneration at the expense of a focus on wider fundamental factors. 

The report highlights that the Stewardship Code’s principles “do not make a sufficiently explicit connection between shareholder engagement and promoting medium- to long-term value and capital efficiency”.  It continues that “there remains a disproportionate focus on AGM-related governance matters at the expense of companies’ strategy for long-term, sustainable value creation”.  In response the IA will develop a set of guidelines, the Stewardship Reporting Framework, “to assist members when they publicly report on their stewardship activities”.  The IA will also seek wider support and financing for the work of the Investor Forum.  

Other areas considered in the report include the relationship between owners and companies, capital markets, and the legal and regulatory framework. 

The press release and the full report are available on the IA website.  Our related Governance in brief publication is available here.

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