By Christine Berry
In the debate about ‘responsible capitalism’, shareholders have to date been cast largely in the role of knights in shining armour. Politicians have repeatedly turned to investors to hold companies to account, whether it be over spiralling executive pay or poor bank governance. The so-called 'Shareholder Spring' has comfortably played into this narrative. The reaction from commentators on the left, including George Monbiot and Polly Toynbee, has too often been simply to dismiss shareholder power as a dead duck. This has left the City largely off the hook when it comes to compelling analyses of what’s wrong with the status quo, and how shareholders themselves can be called to account.
But this could be about to change. The government-sponsored Kay Review has concluded that stock markets are part of the problem when it comes to driving short-termist and irresponsible business decisions, and that sweeping changes are needed if the shareholder 'stewardship' on which politicians are resting their hopes is to become a reality.
The Kay Report argues that finance has become too focussed on relationships based on trading or transactions, as opposed to relationships based on trust and confidence: a fundamental cultural shift is needed to reverse this damaging trend. In particular, the report recommends that financial intermediaries should be legally required to act in the best interests of those whose money they manage, subjecting them to much stricter controls on conflicts of interest.
As Kay rightly points out, specific cases of abuse in finance tend to be followed by calls for action to address the particular symptoms on display. Whilst this remains unaccompanied by action to address the root causes – the dysfunctional cultures and perverse incentives - such measures are duly followed by similar abuses popping up somewhere else. It's a lesson politicians would do well to learn as the Libor crisis threatens to bring on another round of regulatory whack-a-mole.
If it is serious about transforming the City, government must go not just beyond Libor, but beyond the banks. For the picture Kay paints - of a dysfunctional system generating huge profits for the City, but failing to serve either companies or savers in the long run - is populated not the Barclays and HSBCs of this world, but by the people managing our pensions and long-term savings.
The next question is how Professor Kay's vision can be made a reality. The report's recommendations outline ways in which key players could be incentivised differently. But one important feature of the dysfunctional system Kay describes is that nobody has an incentive to make this shift in the first place. Indeed, his recommendations to strengthen investors' duties present a major challenge to a status quo in which finance has remained hugely profitable even as returns to savers have slumped. It's a safe bet that these proposals will face significant industry lobbying.
If this is the case, the counterweight to this lobbying – and the catalyst for the shift to a new financial order – will have to come from outside the system. The people with a real interest in this change are ordinary savers: the ultimate owners of capital whose interests are getting lost in a maze of trading relationships, but who have hitherto been largely silent in this debate. It's time for civil society to go beyond bashing the banks, and begin to get to grips with the vital agenda for change which Kay has outlined.
Christine Berry is now head of policy and research at FairPensions.
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