Shareholder power 'holding back economic growth'

Bank of England chief economist Andy Haldane

The Bank of England's chief economist has expressed concern that shareholder power is leading to slower growth.

Andy Haldane told BBC Newsnight that business investment had been lower than was "desirable" for years.

One reason was that a high proportion of corporate profits were being paid out to shareholders rather than reinvested in the company.

He said that in 1970, £10 out of each £100 of profits were typically paid to shareholders through dividends.

Today, however, that figure was between £60 and £70. Mr Haldane argued that left far less cash available for growth-boosting investment and that firms risked "eating themselves".

Corporate short-termism - a focus on immediate gains rather than long-term prospects - was a rising problem for companies and pre-dated the financial crisis, he said.

Mr Haldane believes that one possible major cause of this short-termism is the nature of UK company law, which gives most decision making power to shareholders.

Less long-term interest

The nature of shareholding has changed over time. In 1945 the average investor held a share for an average of six years, but that has now fallen to just six months.

These lower holding periods mean that the people ultimately charged with making decisions may have less interest in the long-term health of the companies they invest in.

He welcomed the Government's productivity plan to boost UK growth, but noted that increasing investment was a major part of that policy and argued that an examination of UK company law may be needed.

While the UK and US systems give a prime position to shareholders in the governance of companies, other models are available. Mr Haldane noted that other systems of corporate law give greater weight to other stakeholders - such as employees and customers - than the UK system.

He argued that the model of the shareholder-dominated firm had been very successful over the past 150 years, but also said it was possible to "have too much of a good thing". With business investment low and productivity growth weak, it may be the time to look again at the model, Mr Haldane added.

Free thinker

He argued that changing management incentives and the structure of companies to better align incentive for the longer term would be "a good thing".

Mr Haldane, who has been the Bank's chief economist since last year and sits on the interest rate setting Monetary Policy Committee, is widely regarded as a free thinker and an internationally influential central banker.

He has previously argued that incentive structures in banks led to short-term decision making, too much borrowing and ultimately contributed to the financial crisis of 2008.

Today's intervention represents a widening of his critique to include non-banks.

On the Bank's Monetary Policy Committee Haldane is seen as the most "dove-ish" member - the least likely to vote for an interest rate rise in the near-term. Today he reiterated his view that rates could go up or down in the future and that he thought the current level was appropriate for the near term.

He said that the UK economy was "still healing" rather than back to full health. Combined with the fact that there are no immediate price pressures (with CPI inflation at 0%) and what he called a "wobbly world" outlook, he did not see a need for an interest rate rise soon.

Speaking about the longer term growth outlook, he said he saw economic "headwinds" such as demographic change, the overhang of high debt from the crisis and its aftermath and the rise of short-termism that could mean economic growth in the future is weaker than in the past.