Member Article

Economy damaged by “short-termism“

The City’s culture of “short-termism” is damaging the UK economy, according to a government backed review of the sector.

The report was compiled by John Kay, a professor at the London School of Economics, who went on to criticise pay policies focussing on quick gains.

Speaking to BBC, Professor Kay said: “A culture of trust relationships, which is actually central to making financial services work, has been displaced by essentially a culture of transactions and trading.”

Trust in the City is now at an all time low, with recent statistics indicating that only 10% of the public believe that bankers tell the truth.

In his report Professor Kay called for a return to a simplified and less prescriptive approach to banking which prevailed before the 1980s, focussing on long-term relationships between executives, fund managers and individual savers.

He is concerned that too many middlemen are present in the City, but also acknowledged that his recommendations could result in job losses. Many middlemen are focussed on short term gains, which damage the long term profitability of firms, while remuneration reduced the returns of the people whose money they were investing.

He is now calling for clients needs to be made a priority, adding: “Anyone who manages money or advises people on how to invest their money ought to have an obligation to put their clients’ interests first.”

Professor Kay also went on to criticise annual bonuses, calling for them to be untouchable until company executives’ reach retirement. He believes that this would help to encourage executives to focus on investment and long term performance.

He said: “We don’t pay politicians bonuses, we don’t pay surgeons bonuses… if we did… it wouldn’t affect how hard they work, but it would affect the way in which they work.”

Other recommendations also included the establishment of a forum for major investors, a government review of the scale of UK merger activity, and the application of a “fiduciary” legal obligation to anyone managing other peoples money or provides investment advice.

This was posted in Bdaily's Members' News section by Ruth Mitchell .