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date: 9 March 2006

embargo: Friday 10 March

'Vicious circle' of business and investor short-termism is harming UK economy

The TUC has attacked the 'vicious circle' of business and investor short-termism revealed in its report published today (Friday), and warned that a lack of long-term decision-making is harming UK business, employees and the economy.

The TUC report, 'Investment chains: addressing corporate and investor short-termism', pinpoints short-term decision making at various links in the complex chain between pension fund trustees, who are employees as well as investors, fund managers who invest billions of pounds worth of pension savings and the companies in which employees' capital is invested.

Pension funds send signals that lead fund managers to think they need to deliver short-term relative performance. To achieve short-term performance fund managers invest funds in companies to achieve quick returns. In turn analysts' research into companies typically focuses on short-term trends in earnings rather than the fundamental drivers of business success. Managers in the companies in which capital is invested are both pressured by shareholders, and incentivised by the structure of remuneration, to focus on quick wins to boost their share price in the short-term rather than invest in long-term sustainable growth.

The aggregate results of short-termism may include merger and acquisition activity that both damages employment and fails to deliver returns to help fund pensions, as well as the misallocation of capital, often on a huge scale such as in the Technology Media and Telecoms (TMT) bubble of the late 1990s.

The TUC argues that the growing use of hedge funds and the shift to defined contribution pension provision could exacerbate the problems of short-termism.

TUC General Secretary, Brendan Barber, said:

'Funding pensions and building a truly successful company are long-term concerns. The current vicious circle of short-term decision-making harms the interests of business, employees and the wider economy.

'Staff want their pensions to grow steadily and securely over the long-term, not see them gambled on risky businesses looking for break-neck profits. Employees also want their own managers to invest in them and the company on a long-term basis, rather than look for quick fixes to meet the demands of investors or ensure their performance related pay. Businesses want a stable environment in which they can plan ahead, without being harried into short-term fixes. Yet at various points in the investment chain these over-riding priorities are being lost. These are not easy issues to deal with, but neither are they intractable.

'Member and employer trustees could work together to develop longer-term investment strategies. Pension funds and fund managers could demand investment research with a longer-term perspective. And companies could agree to take a cool-headed approach to mergers and acquisitions, and structure remuneration in a way that rewards a long-term approach to business success.

'We do not claim to have all the answers but hope to encourage a practical response amongst business, investors and employees, who all have an interest in developing a truly long-term investment and business culture.'

Key findings from 'Investment chains: addressing corporate and investor short-termism', which will be presented today (Friday) to a private seminar of trustees and investment and corporate governance experts:

• Business investment in research and development in the UK continues to lag behind France, Germany and the US, despite a stable macro-economic environment.
• Mergers and acquisitions are often a short cut to short-term profits at the expense of the security and future of company employees but frequently destroy long-term value for shareholders, many of who are employees investing through pension schemes.
• Pension funds, perhaps inadvertently, send signals to fund managers that they are concerned with short-term relative performance. Fund managers in turn follow short-term trends to generate the performance they believe is expected of them, even if this sometimes means investing in companies they believe are over-valued.
• Investment analysis carried out for and by fund managers is often too narrow, evaluating companies' prospects according to short-term earnings and structured company announcements rather than the true drivers of long-term success, such as employment relations, investment and work organisation. Research may be becoming even more short-term as hedge funds account for more broker commission. As John Sunderland, CBI President and Chair of Cadbury Schweppes, said (April 2005):

'The pressure on the sell side has in my view made analysts very focused on the near term and in some instances their understanding of our business fundamentals is less than it used to be... there is increasing pressure to put us in front of hedge funds rather than traditional long funds. It may be old-fashioned, but I view a shareholder as a shareholder - someone whose interests in the success and prospects of the company lasts more than three weeks - or less. It may be the market, and we all know we can't buck the market, but I have real concerns about promoting the use of my company's stock as hedge fund plays - just as I would in if they were chips in a casino.'

• Company directors feel under pressure to hit earnings forecasts even if this means sacrificing investment and delaying long-term projects. Also, executive remuneration may increase incentives for directors to take a short-term approach.
• The shift to defined contribution pensions may increase short-term pressures as individuals move funds over shorter time periods to maximise returns.

The report proposes:

• Reforms that involve business, unions, investors and government. No one element in the chain of investor-company relationships can be dealt with in isolation to tackle short-termism.
• A government inquiry into short-termism, that considers, among other things, possible incentives to encourage investors to hold shares for the long term.
• Trustees should consider implementing long-term mandates with fund managers. The government should encourage the Local Government Pension Scheme to lead the way be developing such a mandate.
• The Combined Code should be revised to make an explicit link between executive remuneration and long-term shareholder value and the importance of extra-financial issues, such as employment relations and long-term investment.
• The UK's corporate governance institutional architecture should be reformed to ensure the interests of working people as investors are properly represented.
• Companies and their investors should operate the 'precautionary principle' in relation to merger and acquisition activity

NOTES TO EDITORS:

- A pdf version of 'Investment chains: addressing corporate and investor short-termism' is available pre-embargo at:

- The report is being presented to a private TUC seminar on Friday 10 March at which corporate governance, investment, government and union experts will discuss the short-termism problem and solutions put forward in the report.

NOTES TO EDITORS:

- A pdf version of 'Investment chains: addressing corporate and investor short-termism' is available pre-embargo at: http://www.tuc.org.uk/extras/investmentchains.pdf

- The report is being presented to a private TUC seminar on Friday 10 March at which corporate governance, investment, government and union experts will discuss the short-termism problem and solutions put forward in the report.

Contacts:

Media enquiries: Ben Hurley T: 020 7467 1248; M: 07881 622416 ; E: bhurley@tuc.org.uk

Press release (1,200 words) issued 10 Mar 2006