“Banks are too focused on executive pay and shareholder dividends and need to focus more on the rights of employees, their creditors and wider society”.
Andy Haldane’s speech, the University of Edinburgh’s Corporate Finance Conference
Known for his radical views, the Bank of England’s chief economist believes banks and companies can play an important role in helping out society. This would require the structural reorganisation of companies and differentstructures of shareholder ownership.
Current corporate structures in companies in the UK and the US, especially in the financial industry, focus on taking big risks and paying out huge sums to executives and investors. Mr. Haldane points out that what is missing is a long-term view that creates conditions for businesses to invest in the future and make them less prone to financial and economic collapses. A shift in the governance and ownership of financial institutions and companies would have a greater impact on the wide economy.
Although the Bank of England already proposed tougher rules to make bankers and executives more accountable for their own actions, with bonus deferrals, caps and the threat of criminal persecution, a lot remains to be done, highlighted Mr. Haldane.
He even put forward the idea that debt instruments like contingent convertible bonds could replace executives’ salaries since bonds are likely to be negatively affected in case of bad financial performance, thus improving the alignment of risk and reward. Rules pertaining to shareholder rights could also be improved upon, following, for instance, the French example where investors who have held shares for a longer period of time are given more voting rights.
Mr. Haldane added: “If these initiatives grew in prominence, they would begin to address some of the short-term and risk-shifting problems embedded in the current corporate governance model.”
BETTER FINANCE believes asset managers and institutional investors should develop a clear policy on shareholder engagement, including adequate management of actual or potential conflicts of interest. Such measures would certainly encourage the promotion of long term investment.
As BETTER FINANCE revealed in its CMU briefing paper published last May, “institutional investors” appear less long-term oriented and more risk averse than individual investors. In contrast, 62% of EU households’ financial savings are typically long term: pension funds, life insurance, shares, funds and bonds. However, as long-term oriented as they may be, EU individual investors have very little confidence in the long term investment services offered to them by the financial industry (as shown by the annual EU Consumer Scoreboard).
It is therefore essential to restore their confidence and trust in capital markets. From the many options on the table, eliminating barriers to individual shareholder engagement, enforcing MiFID and abuse rules and ensuring easy and free access for retail investors to all major capital markets seems like a good start.
More in The Telegraph.