Building an economy that is capable of competing internationally — delivering growth in jobs, wages and standards of living — is not just the responsibility of Governments. As investors, we all have a responsibility for ensuring the success of the economies in which we operate.
The World Economic Forum produces an annual ranking of global economic competitiveness. Switzerland has occupied the top spot in the ranking for seven consecutive years, ranking consistently highly thanks to “world-class research institutions” and high spending on research and development. Switzerland also consistently ranks highly in labour-market efficiency, a tell-tale sign of a strong economy. Germany was ranked fourth in the 2015/16 survey, with the Netherlands, Finland, Sweden and the UK also reaching the top-ten list.
But there is one economic measure that the Investment Association, which represents the £5.5trn British asset management sector, believes investors are in a remarkable position to influence for the betterment of the broader economy and the returns offered to investors – productivity.
Productivity is a measure of the money made per hour worked by employees. It is often overlooked by global economic comparisons in favour of broader studies of competitiveness, but we believe it is fundamental to an economy’s performance.
We believe that measures of productivity are a way of telling whether a country’s businesses are geared at delivering high earnings from the resources they have. According to estimates to the end of 2014, the UK lags all other nations in the G7 group of major advanced economies except Japan. If the gross domestic product per hour worked in the UK is set at an index level of 100, productivity in Germany would be 136. In France it would be 131 and in the US it would be 130.
There are many factors that can affect how much money is being made per employee hour at a given business, but there is a crucial element that can boost productivity in the long-term — investment.
Imagine a company decided it has the budget to hire one more person. Should it hire another salesperson to try to sell more products, or should it hire a researcher to think about creating better products it could sell in the future?
On the face of it, the salesperson will be more productive, notching up sale after sale, hour after hour. The researcher, on the other hand, may not look like a productive hire at all — they aren’t generating any gross value added. But what if after a few months of work that researcher has a brainwave — an exciting new product that could take the UK market by storm. Suddenly, sales across the company could triple, and the whole company becomes far more profitable as a result.
This simple example belies a conundrum that may concern all businesses at various points in their development. Should we put capital to use delivering short-term sales benefits, but risk finding ourselves on uncertain ground in a few years’ time, or should we ignore the pressure to deliver quick results and invest in projects that could make the company a leader in its field in three, five or even ten years’ time.
Allocating some of your hard-won capital into investment in projects that might not deliver for months – or years – can be a bold decision. But if you are under pressure from management, a Board or a shareholder base hell-bent on seeing an improvement in performance every quarter, when you publish your results, investing in future projects can be a foreboding prospect.
That’s where the investment management industry comes in.
In March this year, we issued a Productivity Action Plan, that proposed a number of measures to boost UK productivity. A major theme in our Action Plan is to enhance company reporting for efficient capital allocation. That means encouraging listed businesses to improve their reporting on productivity and capital management, as well as giving more attention to intangibles that may lead to greater productivity such as investment in human capital.
The Plan calls for stewardship and engagement to focus more on long-term value creation and productivity, and eradicating the short-term focus that can currently define the relationship between asset owners and investment managers.
Efficient and diverse capital markets should be developed, with equity investment encouraged and efficiency embedded further into other capital markets. Finally, tax and regulatory obstacles to the provision of long-term finance should be broken down, so that long-term investment can be furthered.
One specific recommendation in the Action Plan was for the common practice of listed companies reporting results quarterly to be scrapped, in favour of half-yearly reporting that is less obsessed with short-term investments for short-term gains.
Time will tell whether our efforts are able to drive greater productivity home, but a concerted effort by investment managers here and across Europe can only help us on the path to better economies, with more jobs and higher living standards for all.
Andrew Ninian is responsible for representing Investment Association member interests as institutional investors on corporate governance and engagement matters. He has oversight of The Investment Association’s Institutional Voting Information Service (IVIS), corporate governance policy development and company consultations or collective engagement with the companies in which the Investment Association members invest.