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Equity investment has become increasingly complex and intermediated, with more and more links in the chain. As a result, the different players are often working to their own agendas and timescales to the detriment of long-term value creation.
Company directors have a clear legal responsibility to make decisions with regard to the long term. This is part of their duty to promote the success of the company. Engagement by investors needs to change to support directors to meet this responsibility. The focus should be aligned with the timescales of the company's business model - which may be very long term. And the stewardship relationship must be based on an understanding of company fundamentals. That’s the best way to create an environment of trust and challenge, which enables those managing the company to take sound long-term decisions on investment and strategy.
The crucial factor is ensuring investors have the information they need to make long-term decisions, on pay and a range of other issues. John Kay was scathing about the effect of quarterly reporting on long-term investment. I agree with his analysis, and the government will work with our European counterparts to change the law so it is no longer required. Owners and asset managers have a vital role here. In order to protect their long-term financial interests they must challenge management to explain the strategy and logic of large deals and provide robust, consistent push-back where they have concerns. Events continue to show it is as true for the shareholders in the bidding company as it is in the target.
The far-reaching reforms I have discussed today will help, but they are the start of a much longer process. One that requires a change in attitude and behaviour among key players in the system. Many companies are beginning to recognise this, and are investing in jobs, skills, supply chain development, and other areas that will help create long-term value. It is only by responding to these concerns that we can restore trust in markets.