Out-Law News 3 min. read

Boosting UK economic productivity depends on long-term investment, says Investment Association


The UK's biggest international investors have an important role to play in improving the country's economic productivity by encouraging the companies that they invest in to take decisions for the long term, the Investment Association (IA) has said.

The IA, which represents the interests of the asset management industry, has published a five-point 'Action Plan' setting out what its members will require of the companies that they invest in (54-page / 2.2MB PDF). Its 12 recommendations, which are designed to remove the barriers to long-term investment, are based around better narrative reporting, improving investor engagement, better behavioural incentives and removing tax and regulatory barriers to long-term financing.

The report has been welcomed by the UK Treasury, which previewed the report as part of last week's Budget announcements. The IA intends to review progress against its recommendations every six months, and will update the chancellor on its work on the first and third anniversaries of the publication of the report.

"Productivity improvements can help drive economic growth and require UK businesses to invest for the long term," said Andrew Ninian, the IA's director of corporate governance.

"The Action Plan … outlines how we are investors can play a fundamental role to help improve UK productivity and support long-term investment. The Action Plan seeks to deliver ambitious and achievable remedies to the ills of some of the most serious causes of short-term thinking in the British economy. The investment industry remains steadfast in its commitment to play its part in fixing the UK productivity puzzle and help fix the challenge of our generation," he said.

'Productivity' is a broad measure which refers to how much money employees make for their businesses for every hour worked. Figures released late last year buy the Office for National Statistics showed that UK productivity lagged behind that of all other G7 countries with the exception of Japan, while UK productivity growth is currently 16% below its pre-2008 level despite increases in job creation and GDP growth over the same period.

The IA's view is that increasing productivity requires long-term investment in infrastructure, factories and equipment, research and development and real estate. However, the UK's post-financial crisis regulatory framework is "not well-structured to facilitate long-term investment approaches", according to its report. Improving the availability of and access to long-term investment would "contribute to confidence, job creation and business investment, all the way from an SME raising money to invest in new machinery to multibillion pound infrastructure projects", it said.

The report recommends that companies be discouraged from producing quarterly reports, which have not been legally required since late 2014. The majority of UK listed companies continue to provide these "voluntarily", but they are "increasingly viewed as a distraction" by investors, according to the IA. Companies should instead better measure their long-term drivers of productivity, and improve their reporting around culture, human capital and accounting for intangibles, the IA said.

Executive remuneration structures should be simplified in line with the forthcoming recommendations of the IA's Executive Remuneration Working Group, as investors were currently spending most of their time engaging with companies over pay issues rather than "wider fundamental factors" such as corporate performance, board leadership, culture and strategy, the IA said. More work should be done to improve conditions for defined contribution pension schemes seeking to invest long-term, while financial regulators should consider whether their approach to solvency and prudential risks sufficiently encourage long-term investment, the report said.

Share plans and incentives expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com, said that the report "demonstrates the commitment of the investor community to playing an active stewardship role, and developing a meaningful dialogue with listed companies on a range of key issues".

"The productivity principles refer to, and build upon, a number of themes around driving long-term performance which have been developing over recent years, including on reporting, governance and stewardship," she said.

"It perhaps comes as no surprise that executive remuneration remains on the agenda with a recommendation that remuneration structures be aligned with long-term decision-making, and an action point to consider and engage with listed companies in light of the findings of the IA's Executive Remuneration Working Group review in early summer 2016. However, it is also noted that the IA's recent review of adherence to the FRC's Stewardship Code found that asset managers had been focussing too much time on remuneration, at the expense of other fundamental factors. Whilst executive pay, in particular the link with strategy and performance, will remain an important consideration, it may be that the Action Plan will serve to re-focus the debate on a wider range of issues," she said.

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