Andy Haldane: Shareholder primacy is bad for economic growth
Andy Haldane, the Bank of England’s Chief Economist, has said that the UK’s shareholder model of corporate governance is holding back business investment and hurting economic growth. In a fascinating interview on Newsnight with Duncan Weldon (formerly TUC Senior Economist), he said that firms now return too much of their profits to their shareholders, and that the primacy of shareholder interests in company law is a key reason for this. He compared this to other corporate governance systems in which the spoils of company success are shared more equally between company stakeholders, including employees and customers.
The TUC has long argued that the priority given to shareholder interests within the UK’s corporate governance system contributes to economic short-termism and lower investment. This view has gained currency since the financial crisis, and influential economists such as Martin Wolf have publicly questioned the role of shareholders in corporate governance and company decision-making. But for such a senior figure from within the Bank of England to question the UK’s corporate governance system on the grounds of its impact on economic growth is highly significant – a striking intervention surely designed to stimulate further public debate.
The full programme is on the BBC iPlayer here.
Or read a transcript of the interview below:
Andy Haldane: One of the main reasons why world growth has been sub-par has been because businesses have not been investing sufficiently and that’s not just a crisis thing…that tracks back over the last several decades. The profits that businesses are earning are being used not so much to finance investment but instead to finance dividend payouts to shareholders or indeed the buying back of shares from shareholders.
Duncan Weldon: So firms are returning too much of their profits to shareholders and not investing enough in future growth?
Andy Haldane: That’s it, they’re almost eating themselves – they’re taking their internal funds and distributing that to shareholders, rather than investing it themselves. So say back in 1970, if you earned £100 as a company, you’d remit roughly £10 to shareholders through dividends and buybacks. Fast forward to today, that’s more like £60 or £70, which leaves much less for investment.
Duncan Weldon: What’s gone wrong?…Why has the firm stopped investing as much as it should?
Andy Haldane: One of the key aspects is the way company law is currently constructed here in the UK and indeed many other countries including the US – which puts the shareholder upfront and centre, it puts the short-term interests of shareholders in a position of primacy when it comes to running the firm.
Duncan Weldon: And should they not be? Should shareholders have less primacy? Should the shareholders have less power in the decision-making of the firm?
Andy Haldane: There are other models of corporate governance around the world which share the spoils somewhat more equally between a wider set of not just shareholders but stakeholders in a firm. Who are the stakeholders – that includes its employees, that includes its customers and its clients.
…[ T]he public limited company model has served the world well from a growth perspective. But …you can always have too much of a good thing. The nature of shareholding today is fundamentally different from what it was a generation ago. The average share was held by the average shareholder just after the war for around six years. Today that average share is held by the average shareholder for less than six months and of course many shareholders these days are holding it for less than a second.
…You look to the financial crisis – what was that about? In many cases it was a result of banks seeking higher return to remit to shareholders. How did they do that? By borrowing too much and therein the seeds of the crisis were sown – that’s very much in the Bank’s remit. Ultimately, if you can change the structure of the system, the structure and incentives within banks and non-banks, that’s got to be better for everyone.
Let the debate begin!