City bonuses create 'short-termism' (From This Is Lancashire)

City bonuses create 'short-termism'

2:20pm Monday 23rd July 2012 in National News © Press Association 2013

The bonuses paid to City high fliers have come under attack for creating "a culture of short-termism" that is damaging the prospects of businesses.

A report commissioned by Business Secretary Vince Cable said the financial sector is too heavily geared towards rewarding traders and middle men and not focusing enough on long-term investment and providing returns to shareholders.

Its author, London School of Economics professor John Kay, hit out at bonuses based on short-term performance and called for a "much needed shift in the culture of the UK's equity markets".

The report, which was set up to examine the impact of UK equity markets on the long-term performance of companies, was welcomed by investor bodies, although the British Chambers of Commerce warned against a "witch hunt" in the City.

Mr Kay advocated wide-ranging reform, including paying executives' long-term incentives in shares that do not vest until after they have left the company, and scrapping requirements for companies to report every three months.

Professor Kay said: "A lack of trust and poorly aligned incentives have helped create a culture of short-termism in our financial markets. This is undermining their role of supporting innovative, sustainable long-term business performance."

This trend encouraged "bad long-term decisions" and the report found evidence of "hyperactive behaviour" from executives who were driven by big takeover and merger deals rather than improving their own businesses.

It even questioned why executives need to be paid bonuses in the first place, saying that they were relatively unusual until the 1980s.

It said: "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 prospect of bonuses would encourage them to perform their duties more conscientiously."

The Business Secretary will later this year respond to the report, which he said was insightful and powerful and "describes vividly the flaws of the UK's financial markets".