By Professor Simon Deakin, Director, Corporate Governance Research Programme, ESRC funded Centre for Business Research, University of Cambridge.
Long-term investment in infrastructure needs a better policy mix
George Osborne’s attempts to encourage British pension funds to invest more in infrastructure projects are to be applauded. Canadian and Australian pension funds have already invested heavily in infrastructure, but UK funds are still reluctant investors. Why?
British prime minister David Cameron tours Newton Heath rail depot. Getty images
Pension fund trustees have a fiduciary duty to get the best return for scheme members after taking due account of risk. Government cannot and should not dictate how or where and how these funds invest their assets. If government wants pension funds to engage with the long term needs of the UK economy, it must first understand the particular pressures they face as investors.
By Professor Simon Deakin, director, Corporate Governance Research Programme, Centre for Business Research, University of Cambridge
John Kay’s interim report finds that equity markets are failing in their primary tasks, which he identifies as enhancing the long-term growth of listed companies and providing savers with an appropriately high, risk-adjusted return on their investments. The failure lies, he suggests, in the way that market actors are currently incentivised. If asset managers are assessed on a quarterly or biannual basis, it is not surprising that they apply benchmarks based on the short-run performance of the firms they invest in.
Corporate managers, on the other hand, believe that they have a legal duty to maximise short-term shareholder value, and act accordingly. Kay rightly suggests that this view is mistaken as a matter of law but, again, it is no surprise that directors and managers think in these terms, given the way that shareholders are routinely described as the ‘owners’ of the firms they invest in. Disclosure rules add to the problem, in particular those requiring quarterly reporting of corporate results. Lawyers will recognise that shareholders are the owners of their shares, not the company, and that they have no right to manage the firm, having delegated this power to the board, but these subtleties are clearly being lost in translation.
By Kevin Gallagher
In Germany this week Brazilian president Dilma Rousseff rebuked industrialised countries for creating a “liquidity tsunami” of speculative capital that is bubbling currencies, stock and bond markets across emerging markets and the developing world. To stem the tide, her government extended a tax on speculative inflows of capital into Brazil.
A new task force report entitled Regulating Global Capital Flows for Long-Run Development, released this week, argues that regulating flows to tame the liquidity wave are justified more than ever in the wake of the global financial crisis. Countries have more flexibility to deploy such measures given the new consensus in the peer-reviewed academic literature and at the IMF that capital account regulations have been effective tools to prevent and mitigate financial crises. In this new environment Brazil, Indonesia, Taiwan, Peru, Thailand, South Korea, and many others have regulated flows.
Brazil's president Dilma Rousseff
However, the report also expresses serious concern that many countries lack the ability to regulate flows because many of the world’s economic integration clubs and trade and investment treaties have started to mandate capital account liberalisation.