It is remarkable that in the midst of the worst economic conditions since the 1930s we have had a year of official national celebrations in the UK. The enthusiastic expressions of national unity engendered by the Diamond Jubilee street parties and royal walkabouts, followed by the universally acclaimed success of the Olympics, both in terms of British medals won and organisational efficiency, have left a golden glow that lingers. We have all been happily, if only tem-porarily, diverted from the dark shadow of double-dip recession. This has been a welcome relief and respite for the Government as its discredited economic policies flounder.
David Cameron, in a flight of optimistic fantasy and hoping for a reflected popularity bounce, has claimed that the renewed confidence of the Olympic effect will bring about an economic revival. Unfortunately for us all, this is simply soft politics. The hard data tells us the cruel truth that GDP continues to plunge, and economists warn that the prospects of economic growth are 'inconceivable' in the near future.
Of course it is only a matter of time before George Osborne starts to blame the sporting festivities for Britain's economic woes. Not that anyone listens to the man dubbed the worst Chancellor of the Exchequer ever, as he comes up with more and more self-serving excuses for his obsession with unreasonable deficit reduction, and the country sinks deeper into economic and social misery as a result. Commentators argue that he should be reshuffled out of office, but this would be an admission of the colossal failure of the Government's Plan A and is probably a U-turn too far, even for David Cameron.
In the meantime, business has to cope with the fallout. After the turbulence of the 2008 financial crisis, retail, utilities, leisure, transport, telecoms and other sectors are increasingly experiencing the impact of seriously reduced consumer demand as real incomes fall and people feel the pinch of the misguided political obsession with austerity measures. The IMF has warned that the UK economy risks a permanent loss of productive capacity and that the Government must take measures to boost consumer and business confidence. So far, there are no signs that the message has got through.
Most companies have already trimmed the fat from their business and now risk cutting through to the muscle. After years of recession and when survival is the name of the game, companies can become preoccupied with financial re-engineering and 'making the quarterly numbers'. Board decision-making can become distorted. There may be a focus on quick-fix solutions at the expense of long-term strategy.
Corporate boards and management will need to re-evaluate their purpose and function in the light of prolonged economic stress. For too long the ethos of some boardrooms has been the maximisation of short-term gains on behalf of shareholders. This is sometimes at the expense of a longer term focus on such issues as customer loyalty, competitive positioning, the development of employee skills, a rational approach to risk management and the fulfilment of the company's values and mission. A major shift in board priorities is necessary to balance the demands of the market for reasonable returns with these fundamental issues essential for corporate sustainability. Companies will have to come to terms with the challenges of a low-growth economy, which we may have to become accustomed to for some years, at least in the UK.
There is no doubt that the financial crisis has exaggerated a tendency to short-termism, already encouraged by the regulatory requirement, since 2007, to produce quarterly reports and interim management statements. The changing profile of investors as a result of the globalisation of financial markets and the use of algorithmic trading systems has meant that the instincts of the trader have replaced those of the engaged investor. Instead of participating in a dialogue with companies over strategy or performance, equity holders may simply exit without explanation. Irrational market volatility can result.
Professor John Kay has made some sensible suggestions to tackle these market shortcomings in his recently published Kay Review of UK equity markets. Abolishing quarterly reports, changing the incentives to all market participants, including company directors and asset managers, so that only long-term business performance is rewarded, and requiring fiduciary obligations to be applied to all relationships in the equity investment chain are among his many recommendations. If implemented, these could help bring about necessary changes in corporate culture and restore trust and confidence in the market.
Nevertheless, however useful Professor Kay's proposals may be in regulating some unhelpful behaviours in the equity market, it is the fragile economic environment that is the more fundamental cause of damaging short-termism. The challenge is for the Government to address the weakness of the economy by adopting policies that stimulate growth rather than commission more regulatory reviews, however worthy. Creating an economic environment in which business can flourish and innovate, pay its taxes and employ and develop its people is one of the main jobs of government. This is a responsibility that the Coalition is singularly failing to fulfil as we sink further into recession, and corporate confidence in its economic policies reaches an all-time low.
Cameron's post-Olympic wishful thinking is simply not good enough.
- Baroness Kingsmill is a non-executive director of various British, European and US boards. Lady Kingsmill can be contacted on firstname.lastname@example.org