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Corporate governance and international development: the role of the Department for Business, Innovation and Skills (BIS)

Perhaps predictably, press coverage of Business Secretary Vince Cable’s speech this week at the Liberal Democrat conference focused on his comments on executive pay in large companies: ‘Vince Cable wages war on the wealthy’ was one headline. However, his comments – and the wider activities of his department in the area of corporate governance – have considerable significance beyond bosses’ pay packets. The Department for Business, Innovation and Skills (BIS) has set in train a number of corporate governance reforms that are intended to tackle short-termism amongst investors, and to facilitate greater understanding of the impact on shareholder value of non-financial issues. These endeavours have the potential to have a highly beneficial impact on the behaviour of British companies to issues of international development.

Companies contribute hugely to many aspects of development. However, those companies that appear to be most proactive in managing their developmental impacts do so because they have understood that what is in the long-term interests of the countries in which they work, is also in the long-term interest of the company. Anglo American, for example, argues that the rationale behind its Socio-economic Evaluation Toolbox (SEAT) is in part driven by the need to manage ‘the implications of what we do for the wider population for generations to come’. In its joint study with SABMiller of their businesses in El Salvador and Zambia, Coca-Cola made clear that the company recognises ‘that the success and sustainability of our business is inextricably linked to the success and sustainability of the communities in which we operate’.

To what degree, however, do the pressures from company owners – their shareholders – support this sort of longer-term thinking? Since the banking crisis, there has been considerable concern that short-term trading on equity markets undermines the ability of corporations to take long-term decisions. According to Meziane Lasfer, Professor of Finance at Cass Business School, City University, ‘the average investment horizon has decreased substantially’ in recent years. Bank of England figures suggest that this short-termism has been a growing issue over time. Holding periods for shares (the time between an investor buying a share, and selling it) have reduced from 5 years in the 1960s to less than 8 months in 2007.

In his speech yesterday, Vince Cable was not merely taking a pop at ‘fat cats’: it was more important than that. Since the Coalition took office, a number of steps have been taken to encourage and require investors to take a deeper and longer-term interest in how the companies they own are operated; and to address corporate reporting structures to include more than simply historic, financial data.

One of the Coalition Government’s early actions on taking power last year was the promulgation of the new Stewardship Code, which operates under the aegis of the newly-formed Financial Reporting Council. The aim of the Code is to encourage institutional investors to take more seriously their responsibilities to the companies in which they invest. The logic of the Code is that equities are not simply a commodity to be bought and sold, rather they are a stake in a business that requires of an investor to engage with that company’s management on key issues of strategic direction.

More recently, the Government has appointed Professor John Kay to undertake an independent review to examine investment in UK equity markets and the impact on the long-term performance and governance of UK quoted companies. The Kay Review of UK Equity Markets and Long-Term Decision Making was established in June this year. It will assess to what extent equity market participants are excessively focused on short-term outcomes to the detriment of longer-term business strategies and value-creation. Kay and his colleagues will report back in the summer of 2012.

The Government has also revived the idea of narrative reporting. Current corporate reporting requirements are largely financial and historic. The idea of narrative reporting is that companies include in their annual reports details of non-financial issues that may be of material importance to the company’s future success – which could certainly include issues relevant to international development. The previous Labour Government introduced and then repealed the requirement for listed companies to produce an Operating and Financial Review. So this is a welcome return of the notion that shareholders need access to non-financial as well as financial information in order to understand the future prospects of a company.

Although these developments are driven to some degree by a desire to avoid a re-run of the financial crises of recent years, the encouragement of longer-term thinking has much wider impacts, including for international development. The UN Guiding Principles on Business and Human Rights make clear that states need to establish legal frameworks to encourage respect for human rights. The same ‘enabling environment’ would have a beneficial effect on the impact of UK PLCs on wider development issues, and the work underway at BIS can be seen as putting in place some of that infrastructure in the UK. The corporate sector has a huge impact on development, and initiatives that focus on the long term are likely to allow more firms to pay attention to the development agenda of the countries in which they operate, and view this as a key tenet of their own success.

The UK donor community sees the Department for International Development (DFID) as the key ministry shaping international development policies and issues. Yet, if the corporate sector is the motor for development, the policies and priorities of BIS are as relevant as those of DFID – and some would argue more so.