Love them or hate them, City analysts are here to stay. But a method of monitoring the performance of the commanding heights of Britain's economy which depends on 1,600 untrained (albeit highly intelligent and highly motivated) people is absurd. Seen by some as little more than bookies' runners, analysts help direct the flow of funds to companies with a total stock-market value of £568 billion.
The very cream of UK industry is in their maw. For unlike the situation in Germany or France, non-quoted companies in Britain pale into insignificance beside the quoted sector. Every major player in every major industry is a quoted company, followed by a horde of analysts pontificating on their share price and concerned solely with short-term share performance rather than long-term growth and investment. Nothing delights the analysts more than a bitter takeover battle with white knights charging to the rescue. In the welter of rumour and counter-rumour, fortunes can be made as share prices gyrate by the second. But is this the way to run a mature economy that more than ever cries out for a long-term approach, particularly when manufacturing investment fell by 15% in 1991?
Much of their research is unoriginal and binned quickly by investment institutions. Worse still, most analysts' experience of industry is limited to a few brief factory visits, where point-scoring against rival analysts and questions designed to find some reason to move the share price immediately are the order of the day. Enough is enough.
The Major government, with a fresh mandate and less enamoured of the City than previous Tory administrations should prod the Stock Exchange to push through reforms to help develop the long-term culture. As we have consistently argued at Management Today, UK takeover rules are too lax. Hostile bids must be made more difficult by forcing the bidder to declare his/her hand from the outset. Agreed bids should be encouraged, and indeed recent evidence from the LEK strategic management consultancy, suggests that they are far more likely to succeed without absurd prices being paid.
Equally the Stock Exchange could do more to encourage its member firms to employ professionally-trained analysts. It is ludicrous that they do not have to have any professional training, do not have to sit professional exams or indeed have any experience of industry. A government keen to see the spread of the small shareholder could kill two birds with one stone by pushing the Stock Exchange to press members relentlessly to cut dealing charges. That would encourage both the spread of the small investor and, more importantly, could make brokers thank carefully about their costs structures. Only the very best analysts would survive such a regime, and broking would fragment into the no-frills dealing service without advice (building societies, Sharelink, etc) and perhaps the specialist independent analysis and advisory services, thriving on the quality of their original research.
The need to establish long-termism in Britain is nowhere better illustrated than by the composition of a new EC share price index based on the market capitalisation of the 250 top European companies. The IndEC database has a creditable tally of 68 UK companies on board and just 51 German ones. But of that 68, only 15 are value-adding manufacturers (six being members of our world-beating pharmaceutical industry). By contrast, 24 of the 51 Germans are manufacturers of one sort or another. We need to be more like the Germans and that means cutting City analysts down to size.