Stock markets serve the users more than anyone else

By 12.03.13BlogSeptember 2nd, 2020No Comments

Performance-related pay should be scrapped says leading Government adviser

“As a source of funds for investment in industry, equity markets in the UK don’t even feature on the radar screen.”

John Kay, visiting professor of economics at the LSE and author of a government-commissioned report into short-termism in the City, told a seminar at the High Pay Centre that stock markets were serving the interests of their own participants far more than companies or businesses seeking to expand.

“I wonder whether the era of public equity markets is moving to a close; they are not effective for raising finance or corporate governance and are being regulated in ways that make it less attractive to be there,” he said.

Shareholders are dispersed and the chain of investment professionals shaving off a small fee from equity portfolios is long. Businesses are forced into taking a short-term approach by a market that is focused on quarterly share price performance.

Evidence for this is that business investment as a proportion of national income is lowest in the UK out of the OECD with the US coming second to bottom. “But I’m more worried about intangible investment: developing the competitive advantage of firms, worrying about reputation and building the skills of the workforce.”

Trust and confidence in the City and business had been undermined and regulation was trying to control behaviour rather than structures, Mr Kay said.

The short-term approach had affected chief executives’ incentives. In his review, Mr Kay said he would pay bosses’ bonuses in shares only, but went further to say he agreed that performance-related pay for people at that sort of level was inappropriate and he would scrap it altogether. “A device that is meant to align owners and executives has become the chief source of friction.”

Chief executives should be more accountable to asset managers and their own workforce. He said the main difference between the UK and Germany is the degree of internal accountability. In Germany, bosses are answerable to other managers in the company while chief execs in the UK regard the job as a prize rather than a responsibility.

Mr Kay would like to see the development of larger-scale asset managers holding companies to account in Britain with a regulatory system more focused on structures. “I would hope that long-term asset managers would be looking for different CEOs who want to grow and develop a great business rather than make a lot of money in 3 to 5 years.”