Selling us short
‘IN THE long run we are all dead,” British economist John Maynard Keynes declared, suggesting the long term was an unreliable guide to those taking short-term decisions. Today, in Ireland as elsewhere, those in leadership positions in politics, business and finance, increasingly measure their achievements within narrow time horizons. Too often the preoccupation is short-term performance – reflected in poll ratings, company profits, investment returns and annual bonuses – and less with longer-term interests. Nowhere has this proved more costly to taxpayers or more damaging than in the financial sector. The banking debacle has taken a heavy toll, not least in the huge loss of public confidence and trust in financial institutions, a loss not easily, or quickly, regained.
The British government has put aspects of the country’s financial sector under close scrutiny, with a review conducted by leading economist, John Kay, highlighting major flaws in its operation, specifically in regard to individual investors and businesses.
A major weakness he identifies in equity markets is the greatly changed investment culture in recent decades. Increasingly, companies and fund managers face competitive pressures to maximise profits and to generate strong financial returns. Accordingly, money managers, whose pay and bonuses are linked to annual performance, are encouraged to take a short-term approach to investment decisions. Short-term gains from frequent trading are taken at the expense of longer-term investment rewards that could be realised by adopting a patient – buy and hold – investment strategy. This aggressive trading culture, he argues, has rewarded the financial sector and companies, but badly serves investors and savers.
The challenge is how to alter the mindset of companies and investment managers to ensure they take a longer-term view. That will require a major change in the culture of investing. But companies, he suggests, should stop trying to manage their earnings to meet or surpass short-term market expectations. Investors should be willing to hold investments for longer. Asset managers and financial intermediaries could provide full disclosure on the costs and performance fees that investors in equities pension funds and other financial instruments must pay. Much of the general critique outlined in the Kay report has equal relevance to the financial sector in Ireland. Likewise, the report and its recommendations merit close scrutiny and debate here.