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Investors have a role in tackling UK's low productivity

Tackling low business productivity levels since the 2008 financial crisis and recession requires more long-term thinking from investors according to the report  How Good is Your Business Really? Raising our ambitions for business performance published last week by the UK’s business-led Productivity Leadership Group (PLG).

The report suggests that short-termist financial pressures can compel managers to seek out quick wins. The authors suggests that larger companies can find that long-term plans that would improve the business but may carry risks before tangible results are delivered to investors “can be blown off course by a wish to deliver quick returns. This often means many large British companies are not given the space or time to experiment and reach their full potential.”

Writing in the report, Sir Charlie Mayfield, chairman of the John Lewis Partnership and UKCES, said boosting productivity was important for society as well as business, and that strong leadership was vital if changes are to succeed. “Productivity is vital not just in driving the growth agenda, but increasing social prosperity and improving living standards, too,” he said, “Yet our current productivity trajectory is flat. The global crisis and recession that followed has left a severe impression on the business world.”

The report acknowledges the comments of the Investment Association (IA), which represents the UK’s fund management industry, which emphasised the need for high quality corporate reporting so that investors can really understand the businesses in which they invest. Higher quality reporting of company strategy,  physical, human, organisational and intellectual capital is required or, it is suggested investors will tend to look at short-term financial returns which in turn shifts incentives for managers to maximise short-term results at the expense of long term value creation.

The report states that, “Making progress here requires effort on both sides. The commitments in the IA’s Productivity Action Plan to develop proposals for measuring the long-term drivers of productivity and performance are a first step. The IA plans to develop long-term reporting guidance which will set out key performance indicators (KPIs) linked to productivity, and how companies can improve their reporting on human capital, culture, long-term strategy, capital management decisions and outcomes. Through the IA, the guidance will set out investors’ views on how these strategic drivers of performance can be reported credibly and robustly.”

Commenting on the report, Andrew Ninian, the IA’s director of corporate governance and engagement, said: “the Productivity Leadership Group’s report identifies a number of concrete ways in which businesses can contribute to productivity improvements in the UK. In particular, we welcome the decision to establish a Productivity Council to co-ordinate the way that businesses can work together and champion best practice in productivity improvements. In addition, the PLG report highlights the importance of companies and their investors working together to drive these needed productivity improvements.”

What do you think?