Cox Short-termism Review highlights importance of industrial policy but detailed recommendations fall short
The Labour Party has today published an independent review Overcoming Short-termism within British Business carried out by Sir George Cox, a former Director General of the IoD.
There is much to welcome in the review. In particular, it makes a powerful case that short-termism, which it defines as ‘the pressure to deliver quick results to the potential detriment of the longer-term development of a company’ is a significant impediment to UK business and economic growth. Importantly, it draws on surveys carried out especially for the Review to argue that there is a consensus among both business and trade union representatives on both the existence of short-termism and its effects, which include a disincentive to think and plan long-term, a disincentive to invest, a disincentive to develop new products, a disincentive to undertake research and a disincentive to recruit.
The review also found an ‘overwhelming consensus’ on the need for Government to play an active role in addressing short-termism. This is important because it punctures the idea that proposals to tackle short-termism are somehow anti-business. As the review says
It is often assumed that business simply wants government to get the macro-economy right and get out of the way. However, that is not the case. Indeed, there was strong recognition that the issue cannot be addressed without strong government action.
The review makes a strong argument that an active industrial policy should be a cornerstone of Government policy.
What is less clear, however, is whether the review’s detailed recommendations, if implemented, would address the problems it powerfully outlines. A major gap is proposals to promote worker involvement and voice. There is strong academic evidence of the business benefits of engaging with staff and involving them in decisions that affect their own and their employer’s future, and many countries especially in Continental Europe whose business performance surpasses that of the UK systematically involve workers in company decision making. Yet the only proposal on workforce issues in the review is to expand the current Share Incentive Plan to encourage wider employee share ownership. Even this recommendation does not acknowledge the fact that income is a major determinant of whether employees are able to participate in company share schemes where they exist; any attempt to widen employee share ownership significantly will only succeed if shares are allocated free of charge to employees on low pay.
The report rightly highlights the need to make greater use of public procurement as a tool of industrial policy, which is welcome, although there is little detail on how this should be addressed. The section on mergers and takeovers comes up with just one recommendation – limiting voting rights to shareholders who are already on the Register before the Offer Period – which would prevent hedge funds and other short-term share traders from profiting from a takeover, but would not address the fundamental need to regulate takeovers to ensure that they operate in the long-term interests of the target company, rather than simply lining the pockets of shareholders. There is no doubt that equity markets are in need of reform, but the review’s focus on using tax incentives to encourage longer-term shareholding ignores other important areas of corporate governance reform. The proposals on tapering Capital Gains Tax on shares look costly and risk creating tax avoidance opportunities and other unintended consequences.
So, a good review of the problems of short-termism, but not one that provides all the answers!