Short-term thinking hits nations as a whole, not just big business

Anthony Hilton
The London Evening Standard, 30th July 2015

The Bank of England has added to the fears raised by Hillary Clinton over the capitalist way. Change is needed.

On the campaign trail in the US, Hillary Clinton has a bright new message for voters. She says capitalism is failing them. Corporate America has been hijacked by Wall Street. Shareholders’ demands for short-term profits are sucking business dry and robbing it of the funds needed for long-term investment. As a result big business is failing the nation.

And we heard a similar message here in Britain last week. Tellingly, it came not from some politician on the stump drumming up votes for Jeremy Corbyn, nor a Left-wing academic, nor a lingering refugee from the Occupy movement that took over St Paul’s Cathedral a few years ago. Rather it came from Andy Haldane, whose day job is chief economist of the Bank of England.

The manner of delivery was also significant. He put his message across not in the usual way of central bankers in an opaque speech in some remote part of the country to an even more obscure gathering of a few hundred people but to millions on television via the BBC’s Newsnight. He wants people to hear and think about his concern that the system may have lost its way. Given Haldane’s position at the Bank it is clearly a message his boss, Governor Mark Carney, wants the nation to hear too. Haldane has a deserved reputation as a free thinker, not as a loose cannon.

Clinton and Haldane told essentially the same story. Profits and cash which should be invested by companies in re-equipping, in research and in training to deliver economic growth for themselves and the nation, were instead being paid to shareholders either directly as dividends or indirectly through a mechanism known as buybacks. This is where the company uses its own or borrowed money to buy back and cancel its own shares so that those left behind on the stock market (or owned by management) are worth more and get a bigger share of future dividends.

The figures support the critics. In the US, companies are investing a lower proportion of their profits than at any time since 1947. For every dollar spent on investment today they pay out $7 or $8 in dividends. Money spent on buybacks last year exceeded $500 billion, says Goldman Sachs, and this year it will be $600 billion. Meanwhile in Britain, said Haldane, a company which a generation ago had, say, cash of £10 would have paid out £1 to shareholders and retained £9 to invest for the future. Today they pay out £6 and retain £4.

The result is that investment is too low, productivity does not improve, wages stagnate and the economy fails to grow. No wonder we are in trouble. Capitalism has lost the plot.

Clinton and Haldane are not the first to say this but what matters is that they are mainstream. In fairness to earlier voices in the wilderness, the concerns have been around for a while. Andrew Smithers, an economist with an impeccable City pedigree, wrote a book last year which delved into national and business statistics to prove that paying management big bonuses was against all our interests because it made executives less willing to invest in case the disruption hit short-term profits. But who reads books, least of all books on economics?

In passing, Smithers pointed out another startling fact. By granting themselves free share options and then organising equally massive share buy- backs, businessmen were in effect transferring the ownership of companies from the wider public to themselves. A billion here and a billion there and pretty soon you are talking about real money, as US oil billionaire Nelson Bunker Hunt once said. Smithers estimates that in the past 15 years or so American executives have personally acquired roughly a third of Wall Street-listed corporate America — using other people’s money.

Meanwhile, Larry Fink, the American boss of BlackRock, probably the largest fund-management group in the world, has shown he is unhappy too. In a recent letter to corporate chiefs he complained about how too many of them delivered short-term rewards to shareholders (like him!) “while under-investing in innovation, skilled workforces and essential capital expenditures necessary to sustain long-term growth”. He did not add but could have done that private, family-owned businesses invest massively more than their public counterparts.

This points to why Clinton thinks she is on to a winner and why Haldane’s remarks also strike a chord. It is well known over here that people have lost trust in business and finance, and all the efforts being made to regain that trust are making very little headway. What is less understood is that the core reason for this loss of trust is that people at large feel the system has been hijacked by well-connected insiders — either in the City or in the boardrooms — and is now being run for their benefit not for the benefit of the community as a whole. They may not understand the cause but they see the symptoms in unethical behaviour, supply chains using child labour, abuse of monopoly power and grotesque bonuses. Their disgust at the lack of tax paid by companies such as Amazon, Starbucks and Google plays to the same theme — in their arrogance it seems companies no longer care about meeting social responsibilities.

Trust will not be regained until they feel they have got their capitalism back and that requires fundamental change. People no longer want financial capitalism and its mantra of shareholder value, with its belief system that says the only thing that matters is a higher share price and that everything — jobs, communities, investment — has to be subverted to this end. They want a capitalism which is more even-handed in its share of the rewards and far more clearly of benefit to all the stakeholders in society — far more sustainable, in fact.

This is where Haldane appears to be going in the debate he wants to kindle. The focus on shareholder value had delivered huge benefits down the years but it is possible to have too much of a good thing. There are other business models in the world where the rewards are more evenly shared between customers, suppliers, employees and government. Perhaps it is time to take a closer look at them.