by Dr Richard Wilson
The weak flank of the UK economy has been the comparatively low levels of investment by both Government and business. In Government, political and economic pressures often conspire to undermine sustained and substantial investment in infrastructure and research and development. In business, the Kay Review of equity markets in 2012 concluded that short termism is a problem in equity markets. This in turn could discourage long term investment by business. Low levels of public and private investment have almost certainly contributed to the UK’s disappointing productivity performance.
Section 172 of The Companies Act 2006 requires company directors to act “in a way he [sic] considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.” In the process of doing this, directors are required to have regards to a number of considerations, including: the interests of employees; the likely consequences of any decision in the long term; the need to foster the company’s relationships with suppliers, customers and others; and the impact of the company’s operations on the community and environment.
If company directors gave greater consideration to these requirements, while balancing their responsibilities to shareholders, then it is possible that the tendency towards short-termism in some businesses might be reduced.
The Select Committee for Business, Energy and Industrial Strategy has published a report recommending, amongst other things, that the boards of listed companies should be required to explain precisely how they have considered each of the different stakeholder interests and how this has been reflected in financial decisions. The Committee also recommended that boards of listed companies should explain how they have pursued the objectives of the company and had regard to the consequences of their decisions for the long term, however they choose to define this. Where there have been failures to have due regard to any one of these interests, these should be addressed directly and explained (https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/702/70202.htm).
This is a sensible incremental reform and one which the Government should give serious consideration.
However, what is a sauce for the goose is sauce for the gander. Just as companies should have to report and explain when they have failed to discharge key responsibilities, so Ministers should have to report and explain to Parliament and to Select Committees if they fail to achieve key objectives – including investment in infrastructure and R&D.