British companies are often accountable to passive shareholders, such as pension funds, leading to risk aversion and short-termism. The US invests differently, with much better results, says Tom Focas
The UK economy is in dire need of a rejuvenation. Growth is still stagnating, productivity lags behind global competitors, and industries that once anchored the nation’s prosperity are losing ground. As policymakers endlessly debate various reforms, one glaring issue remains largely unaddressed: the UK’s corporate culture is ill-equipped to foster the kind of long-term investments that lead to annual growth of 3 per cent to 3.5 per cent per annum. The answer may lie in adopting some of the structural advantages seen in the US where active ownership, venture capital, and long-term thinking drive economic expansion.
At the heart of this issue is the way UK listed companies are owned and managed. British management is notoriously short-term in its outlook, constantly driven by the immediate pressure to deliver dividends to appease shareholders. Unlike the US, where active owners like venture capitalists (VCs) demand strategic foresight, British companies are often accountable to passive shareholders, such as pension funds. These diffuse owners exert little direct pressure on corporate leadership to pursue bold, long-term strategies that could drive innovation and GDP growth.
In the US, VCs have a very different relationship with the companies they invest in. They actively shape company strategy, demanding accountability and ensuring that management is thinking about long-term viability, not just next quarter’s earnings report. This pressure creates a culture of constant innovation and growth, encouraging firms to take risks and adopt new technologies, leading to increased productivity and GDP growth.
The average British citizen likely has no idea which companies their pension funds are invested in, let alone how these firms are performing
In stark contrast, UK shareholders are largely invisible. The average British citizen likely has no idea which companies their pension funds are invested in, let alone how these firms are performing. This disconnect has profound implications for corporate governance. Without clear and direct ownership pressure, UK management is rarely incentivised to invest in the long-term projects — R&D, tech and skills development — that can deliver sustained economic growth. Instead, the focus remains on short-term gains, often driven by the need to appease pension funds and passive shareholders that expect immediate returns in the form of dividends. The UK’s fixation on dividend payouts stifles the very investments needed to foster future growth.
Lagging productivity growth
This lack of long-term vision in British corporate culture is reflected in the country’s lagging productivity growth. While US companies plough money into the next Google or Facebook, British firms are left paying out dividends, stifling investment and long-term growth potential. The result is a productivity crisis, with UK workers producing less per hour than their US counterparts.
The solution lies in fostering a culture of active ownership that can hold UK management accountable for long-term outcomes. Institutional investors need to step up their role in corporate governance. While individual pension holders may not be able to exert direct pressure, the funds that manage these investments can. They should demand that British firms prioritise sustainable growth and invest in the innovations that will drive the future economy. This shift would not only boost corporate profits over the long term but also lead to more robust GDP growth and higher productivity.
A shift toward a more US-style investment culture, where active owners demand results and long-term thinking is rewarded, is crucial for the UK’s economic future
Furthermore, the UK should actively encourage venture capital investment. VCs in the US have a long history of driving innovation by holding firms accountable to a clear growth strategy. If the UK government were to create incentives for more VC investment — through tax breaks, regulatory reforms, or public-private partnerships — British firms would be more likely to receive the long-term financial backing they need to compete on the global stage.
A shift toward a more US-style investment culture, where active owners demand results and long-term thinking is rewarded, is crucial for the UK’s economic future. The stagnation in productivity, coupled with the short-term mentality pervasive in corporate Britain, is a recipe for continued managed decline. Only by embracing a culture that values long-term investment can the UK hope to reverse its economic fortunes and secure a more prosperous future for the next generation.
Tim Focas is head of capital markets at Aspectus Group