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INVESTORS HAVE NOT NOTICED THAT THE ‘GAME’ IS CHANGING


(This article was published by Financial Times)

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Letter published in the Financial Times, 8 January 2020


It is hard to reconcile the push by some investment companies for chief executives to purchase more shares in the companies they manage (“Pressure for UK chiefs to increase skin in the game”, FTfm, January 6), with the mood growing away from shareholder value as the primary (or only) corporate purpose towards broader societal and stakeholder interests.


The relatively recent fashion for linking executive compensation to stock prices has already contributed to significant destruction of societal value, environmental degradation, increasing short-termism, shrinking business investment relative to share buybacks and dividend payouts, and long-term damage to shareholder interests. We have now reached the stage where equity markets no longer perform their function of financing industry and the real economy. Rather, industry is expected to funnel ever more of its profits away from the real economy and to the world of finance. The world is upside down.


Investors are right that management should have more “skin in the game”, but it seems that some have failed even to notice that the nature of the game itself is changing, and that doubling down on stock-based incentives is the last thing any of us need.


We have previously argued that it is foolish to believe it can be left to shareholders to drive reform of corporate practices, since they will naturally be driven by their own short-term interests. This latest salvo proves the point.


Dr Joe Zammit-Lucia Founder, RADIX, London SW1, UK

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