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Short-termism and lack of purpose is damaging UK companies and wider economy reports conclude

British companies are losing out – potentially by over £130bn a year – because they lack clear corporate purposes that unite all stakeholders in common goals and values, according to the interim report by the Purposeful Company Taskforce, which was established by the Big Innovation Centre.

The taskforce believes that having companies with a clear purpose makes them more successful. The report suggests that the purpose of a great company is its reason for being and defines its existence and contribution to society as well as its goals and strategy. “Underlying it is a set of values and beliefs that establish the way in which the company operates. Purpose is as fundamental to a corporation as our purposes, values and beliefs are to us as individuals. Purpose operates on four major planes – a covenant with customers, a reciprocal human contract with employees, mutuality of interest between society and firm and the desire to contribute to human betterment.”

One of the reasons that British companies are failing in having a clear purpose, the taskforce believes is because UK companies have the most fragmented, diversified shareholder base with fewer large “block holdings” of any other major country. The report states that, block holders are able to act as anchor owners who lend stability to companies and their executives who are otherwise buffeted by short-term pressures. At the same time, block holders have the interest and resources to gather costly information about the companies in which they invest. Block holders promote corporate purpose and are associated with higher R&D expenditure, innovation and firm performance

One of the problems of a fragmented shareholder base, the taskforce found, is that financial markets systematically underestimate the value of investments that purposeful companies make in the ‘intangibles’ of know-how, R&D and skills. As a result, the report states, over the last 15 year there has been a halving of listed companies, a surge in delisting and accompanying decline in public offerings. It also means that investment in R&D in the UK is static and below the international average. The taskforce concluded that ” With the growing importance of intangibles in the 21st century, if Britain does not foster purposeful companies it risks becoming an economic backwater.”

The taskforce has produced a set of recommended reforms that it said will address some of the weaknesses of British businesses. These include promoting engagement and stewardship; redesigning executive pay to reward long term purposeful strategies; better company reporting of intangibles; restricting the rights of short term shareholders in takeovers; relaxing disclosure rules to encourage block holding; making changes in practice and law to make delivery of purpose more central to business and making changes in the British tax rules to reverse the decline in British equity ownership, including creating a British sovereign wealth fund.

Will Hutton, chair of Big Innovation Centre Steering Group, taskforce member and Principal of Hertford College Oxford said, “In my view this is the best attempt yet to set out the evidence that Britain has had a lackadaisical approach to company ownership, so carelessly creating economically and morally damaging company ethics and practices. Putting it right is feasible if a consensus can be built for change. I hope this report will contribute to doing just that.”

A consultation is now taking place with the responses being used to inform the content of the group’s final report due to be published later this year.

The conclusions made by the Purposeful Company Taskforce are similar to those reached in another report published this month by, Tomorrow’s Company, UK Business: What’s wrong? What’s next? which was the outcome of the Futures Project that reviewed progress over the last 20 years since the founding of the think tank in 1996.

This report states that there is a focus of producing short term outcomes and companies are being squeezed between pressures to return cash to shareholders and reduce prices for customers. This is also leading to less long term investment by companies and reduced spending in important areas such as infrastructure, housing, antibiotics and renewable energy. At the same time companies are not investing in their workforce.

The report produces a range of solutions to this which are based on focusing on the long-term, relationships and having values and a clear business purpose. By changing corporate culture the report concludes that as well as boosting the UK economy and benefiting all stakeholders, shareholders will actually gain more in the long-term.

What do you think?