City obsessed with short-term profits

A government-backed report has accused the City of an obsession with short-term profits and "poorly aligned incentives".

Professor John Kay of the London School of Economics has criticised a prevalent culture that has encouraged ‘myopic’ and ‘hyperactive’ behaviour to produce instant rewards.

He also suggested that the City’s scale of incentive had grown out of hand, driving inequality of returns and a breakdown in trust.

"Over the last ten years… people in the financial sector have made a lot of money, and savers have done pretty badly", he told the BBC’s Today Programme.

Bonus driven culture has also encouraged an antagonistic response to City personnel, not least at a time when banks have been rocked by scandals and faults.

"Many people doing responsible and demanding jobs – Cabinet ministers, judges, surgeons, research scientists – do not receive bonuses, and would be insulted by the suggestion that the prospects of bonuses would encourage them to perform their duties more conscientiously", the report said.

In a section entitled ‘Establishing the right incentives’, Professor Kay suggested that incentives did not keen to be eradicated, but should reflect long-term value creation rather than short-term gain.

Amongst his recommendations are: a shift in the regulatory philosophy towards ‘appropriate incentives’ rather than schemes that can be manipulated; creating a stewardship code; and tackling ‘misaligned’ incentives.

Part of the way this could be achieved, he notes, is through an abolition of ‘excessively frequent’ quarterly reports, which would reduce the pressure of immediacy that was instigating such short-termism.

Business Secretary, Vince Cable, praised the review, alerting to its vivid description of the flaws of UK financial markets.

To Chris Hitchen, a member of the Advisory Board, the recommendations were pivotal for savers.

"If savers are to achieve good long-term returns, they need everyone in the investment chain to be aligned with them", he said.

The in-built concern, however, is that the vested interests between politicians and City capitalists will ensure that the most reformative traits of the report never come to fruition.

Keith McDonald
Which4U Editor

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