The boss of Legal & General has backed a call by the Bank of England’s chief economist for companies to invest for the long term instead of paying out cash to feed the short-term demands of shareholders in the City.
Nigel Wilson, chief executive of one of the biggest investors in the UK stock market, said his investment management arm would take a hardline with bosses who prioritise payments to shareholders over the future health of their companies.
Legal & General and nine other investors controlling £10tn of assets have written to the chancellor setting out ways to increase long-term investment in research, employee skills and technology as well as pledging to oppose companies that fail to think long term.
In a speech last week, Andy Haldane, the Bank’s top economist, said UK company law attached too much importance to shareholders over other priorities such as employees, suppliers and investment. He said dividends that outpaced profits and companies buying back shares were partly to blame for the economy not fulfilling its potential.
Announcing Legal & General’s first-half results, Wilson said: “I talk to Andy about this a lot. We want people to invest. Dividends are an important part of the return to shareholders. What we don’t want is people overdistributing by share buybacks or overpaying dividends and not investing for the long term.”
Wilson called for the creation of a “virtuous circle” of more investment, better jobs and higher pay to support the economy. He added that British businesses were not ambitious enough and that the government needed to do more to encourage exports, despite George Osborne’s vow to support the “march of the makers”.
In their letter to the chancellor, the investors said they would oppose unjustified spending cuts, dividend payments and other measures that focused too much on short-term returns, especially if they were designed to increase executive bonus targets.
The investors, which also included Standard Life, Aviva and fund manager Neil Woodford, said: “Longer-term strategies need to be communicated well to investors and markets, and excessive reliance on quarterly reporting can undermine a long-term focus by management and investors.
“Through our company engagements, we will support companies investing for long-term growth and challenge those that are compromising long-term competitiveness and productivity.”
Legal & General’s first-half operating profit rose 18% to £750m. The company increased its interim dividend by 19% to 3.45p a share.
This article was written by Sean Farrell, for theguardian.com on Wednesday 5th August 2015 09.54 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010