Secretary of State for Business Vince Cable has launched a consultation into corporate governance and whether failures in that process are stoking a trend for short-termism in investment that damages the long term interests of companies and many of their investors.
Cable has asked investors and directors for their views on the issue.
"This is a call for evidence on the existence of short-termism and market failures in UK equity markets," said the consultation document. "It aims to identify the issues and their causes, whether in law or behaviour to ensure efficient, effective and transparent allocation of capital and the long-term sustainability of UK companies."
"Recent events have exposed weaknesses. We must ensure that growth is not compromised by capricious or volatile markets, or captured by a small number of intermediaries at the expense of the many who provide the capital," said Cable. "For decades, regulators have had to react to failings of corporate governance ... but regulation can also be a blunt and expensive instrument, and it certainly does not get everything right. The success of the UK corporate governance framework rests on getting the balance right – between regulation and best practice. It involves companies and investors working together."
The consultation will examine allegations that publicly quote companies are being run in order to create short-term spikes in share value, rather than for the long-term benefit of the company, the economy and its longer term shareholders.
"For example, some suggest that equity markets are increasingly focused on the short-term and that this may be having a detrimental effect on their efficiency, on the return on investment and on company behaviour," said the consultation. "Others argue that the incentives of company directors and those managing assets may not align with the interests of company shareholders. Finally, there has been a wide ranging debate on the economic case for takeovers and the effectiveness of engagement by shareholders in the companies they own."
"The paper I am issuing today is a call for evidence from across the corporate world and beyond to examine whether the system in which our companies and their shareholders interact promotes long-term growth – or undermines it," said Cable. "I want a serious examination and debate into the role of investors and the time horizons over which they operate; the factors influencing board decisions; the reasons for the growth of directors' pay; the impact of the investment chain; why returns from equity have reduced; and why takeovers that are economically damaging still take place."
Cable said that the Government had established a Stewardship Code which gives shareholders information about what powers they have and encouraging them to act. Companies can adopt the Code and pledge to abide by it, allowing investors to choose only those companies to invest in.
Cable said that the Code would help shareholders in "holding directors to account for their strategic judgements and in guarding against boardroom hubris".
The consultation will also ask for shareholders' and directors' views on takeovers and whether they are regulated properly and are conducted in a way that brings the most economic benefit.