The financial markets now dominate the economic and industrial agendas - to the detriment of the long term public good.
The three Propositions at the heart of our Case.
Way back in 2002, when researching for the book, Having Their Cake, we formulated three Propositions. These seemed to be a reasonable synthesis of the mass of data that exists about the leadership of large quoted companies, the behaviour of the investment markets; what happens between managers and the markets; and the effects on national economic well-being. We were slightly surprised that, despite extensive media approval for the book, not very many people wanted to know about our findings and developing convictions. Quote: Oh, I do hope that you are being too pessimistic....
Since 2002, there has been much research and data that demonstrate that what we observed was accurate. But, there is still a mysterious silence about the underlying causes of many phenomena afflicting British business.
For example, why do some commentators speculate that low R&D and Capex investment by large UK companies might be due to pension fund deficits, high corporate taxes or excessive bureaucracy; when dividends to shareholders by FTSE 100 companies are 164% of R&D spending - as opposed to 19% in Japan and Germany and 48% in the US? Surely more credible causes might be over-distribution to investors and the loss of most UK-quoted large high-tech companies as a result of the lack of investor support, management failure and foreign acquisitions?
Why do so few commentators ask about the effects on UK companies' long-term performance of the national obsession with mergers and acquisitions rather than investment in innovation and organic growth? (The answer is that companies that focus mainly on internal investment and organic growth tend to innovate more, survive longer and create more value.)
We hear nothing but silence from the CBI and Chancellor about the increasingly speculative and short-term orientation of the investment markets and the effects of this on the durability and very existence of larger UK-quoted companies. Is it simply because they don't understand or is it because they think that it is dangerous to be critical?
Nobody in a position of influence seems at all concerned about the appropriation of a lion's share of industrial wealth by managers and the financial markets and the glaring inequalities so created. Are they not concerned about the detrimental effects on economic performance and growing public cynicism and distrust of 'people who run large companies', the financial services industry and politicians?
So, we would like to return to the Propositions of 2002, and review again the evidence backing them.
We would emphasise that the Propositions concentrate on larger quoted companies, and obviously these do not represent the entire UK economy. But they do represent a large part of GDP and whether we like them or not, sometimes huge companies are needed to support extensive investment, R&D and global marketing.
For example: FTSE 100 companies' pre-tax profits represented 42.3% of total UK corporate profits and FTSE 100 market value was 148.7 % of UK GDP in the peak year of 2000.
In the USA, S&P 500 companies were equally influential. In 2000, their pre-tax profit was 88% of total corporate pre-tax profits, and their market value represented 128.9% of US GDP.
So we are looking at massive influences on the long-term wellbeing of the UK and the US economies.
In this regard, the values, performance and behaviour of those who lead and invest in them is of great importance. Which ought to be a cause for national concern, as we shall see (In Proposition Three) that the average performance of FTSE and S&P companies is pretty poor.......
Back in 2002, we developed three Propositions, based on over 60 interviews with top managers, senior folk in the City, business academics, senior secretaries - (an excellent source of information about what really goes on) - and many others. These Propositions featured in our book, 'Having Their Cake' but were rather buried in the middle of the book. Having continued our interest in the doings of top managers and the financial markets, we were struck by the way in which subsequent events seem to have panned out broadly as predicted.
The Propositions are interlinked:
- Proposition One is about the 'System' of relationships between the financial markets and top managers of large companies - and how the markets have come to dominate managers' agendas and actions.
- Proposition Two is about the impact of the relationships between markets and managers on changing management behaviour - and the profound effects of this on large companies and the interests of stakeholders other than investors and managers.
- Proposition Three examines the effects of the manager/market relationships on the performance of large UK (and US) companies and on the UK economy.