Chris Giles (FT) is examining why Britain is suffering from weak productivity growth. As part of his series, he wants to hear what readers think is the main solution to the UK’s weak productivity growth since the financial crisis of 2008. Share thoughts directly with him at firstname.lastname@example.org. Some may be published in a follow-up piece.
UK company dividends are high & investment low
This lack of investment and innovation means that the country’s productivity is low. The output per hour worked in the UK is about 16% below the average for the rest of the G7 advanced economies. The UK productivity is around 27% below that of Germany – despite the UK labour force working almost the longest hours in the western world and the country is neither rebuilding its manufacturing base, nor developing new technologies.
He itemises the boardroom dominance of accountants:
- The UK has around 34,435 general practitionersto take care of family health,
- but over 360,000professionally qualified accountants out of an estimated global total of almost three million.
- A fifth of FTSE 100 chief executivesare accountants.
- 61 out of the 100 audit committee chairpositions at FTSE100 companies are held by someone who previously worked for at least one of the Big Four firms
- Some 64% of FTSE100 finance directors are linked to the big four accounting firms.
Sikka then argues that short-termism, leading to the neglect of the long-term prosperity of companies and the economy, has been accelerated by the boardroom dominance of accountants.
Compared with other developed countries, UK companies are paying out the highest proportion of their earnings in dividends.
According to the Bank of England’s chief economist, in 1970 major UK companies paid £10 in dividends out of each £100 of profits – but by 2015 the amount was between £60 and £70.
And at the same time as paying this large percentage in dividends many companies were downsizing labour and reducing investment, lagging behind the EU average:
- Since the 1990s, the UK’s expenditure of research and development has fluctuated between 1.53% and 1.67% of GDP. The EU-28’s R&D investment was 66.6 % of the United States’ expenditure and 48.5 % higher than in China (2015 figures, Eurostat data, March 2018 – investment continues to rise).
- On average, in 2017, EU countries put 20.1% of their GDP into long-term productive assets. The UK put only 16.9% into productive assets.
Sikka asserts that the most effective way to disrupt the accounting-think prevalent in boardrooms is by appointing directors who are focused on the long-term – appointing employees and consumers so that they can challenge the obsession with short-term returns and promote investment in productive assets.
Giles quotes Lord Andrew Tyrie, new chair of the Competition and Markets Authority, who told companies in July to stop “ripping people off” or face the full force of the watchdog’s sanctions. His focus is mostly on regulated markets such as banking and energy, where companies are accused of exploiting vulnerable households by extracting a “loyalty penalty” if they do not switch suppliers.
Lord Tyrie told MPs during his confirmation hearing for the CMA in April that retail banking and auditing were parts of the economy that did not work in the interests of the public or productivity.
Scott Corfe, chief economist at the Social Market Foundation, a think-tank, claimed that pro-competition moves had some potential for raising productivity growth rates. He suggested that consumers should be switched between energy suppliers automatically after several years to stop companies exploiting customer inertia.
See this video: https://www.ft.com/content/ae25a5bc-9405-11e8-b747-fb1e803ee64e (possible paywall)
After noting that since the mid-2000s, British industries have become more concentrated, with fewer companies enjoying larger market shares, Giles focusses on this ‘one key question’:
Is inadequate competition contributing to Britain’s feeble growth in output per hour worked?
We look forward to the next article in the series.