Warren Buffett is all the proof John Kay needs that long-term investing makes sense
The Kay review identifies the problem, but tackling corporate and investor "hyperactivity" needs a cultural revolution.
The Kay review identifies the problem, but tackling corporate and investor "hyperactivity" needs a cultural revolution.
7:36PM BST 23 Jul 2012
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John Kay must be an optimist.
He’s just produced a 113-page report into short-termism in UK equity markets. Who does he think’s got the concentration span to read that? Three pages would be a stretch for most of the people it’s aimed at. And that’s allowing for page 2 being intentionally blank – like the mind of any top City trader.
Luckily, you don’t have to delve too far into Kay’s critique of “hyperactive” companies and investors all seeking “immediate gratification” to spot that the economist has done an OK job of identifying the problem. Whether his recommendations will ever fix it is another thing entirely. Even Kay admits he can only offer “long-term solutions”, which sounds kind of circular.
For him, the blame for the current knee-jerk investment environment is shared pretty equally between companies and shareholders.
UK-listed companies continually lag their peers in Germany, America and France when it comes to traditional benchmarks of long-term thinking, such as business investment or R&D spend.
And it’s not hard to see why when companies are run by bosses caught awkwardly between their next bonus or a pay-off, with the average tenure of a FTSE-100 chief executive less than five years. No wonder they tend to go for the supposed quick fixes of internal shake-ups, financial engineering or M&A rather than making decisions that might reward their successor. They do that too, as Kay shows, despite nasty history lessons from the likes of GEC, ICI and Royal Bank of Scotland.
Meanwhile, investor time horizons are increasingly measured in nanoseconds – and not only those of high-frequency traders otherwise known as computers. Quarterly targets and the bonuses that ride on them have made fund managers increasingly twitchy, while the distance between the company and the saver who wants to invest in it has been lengthened by a costly chain of middle-men each taking a cut, including investment consultants, independent financial advisers and pension trustees. What gets lost in the process is any real engagement between the company and its shareholders.
Kay’s solution for all this, as he admits, amounts more to cultural revolution than quick fix – a sort of everyday “shareholder spring”. Among his 17-point plan is the proposal to axe all cash bonuses for directors, replacing them with share-based awards that must be held “at least until after the executive has retired from the business”. He’d also like an end to mandatory quarterly reporting (wouldn’t we all) for both fund managers and companies.
Then there’s his proposal for a new stewardship code that goes beyond the current focus on corporate governance to push shareholders to ask hard questions on such things as strategy and capital allocation – though if they’re not doing that already, what are they getting paid for? He’s keen too on a new “investors forum”, so shareholders can club together to club the management or, as he ventured on Monday, to help sort out the Barclays board – even if that looks wishful thinking.
Sure, much of this, if ever implemented, might encourage a more long-term approach – though Kay could have saved himself some words by getting to the apotheosis of such investment earlier than page 56. It’s there he mentions the man who once declared “our favourite holding period is forever”, adding: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
As one of the richest men on the planet, Warren Buffett kind of makes Kay’s case for him.