This week, I’d like to start with a thank you to Ed Miliband. It isn’t often that I write a column here and find it almost immediately validated by a leader of the opposition. But that’s what happened this time.
Last week, I noted that I wouldn’t invest in shares in a tobacco company. That’s not because tobacco companies are evil (although you can, of course, argue that they are), but because taxation and regulation will eventually make their business models unsustainable.
No sooner was the column out than Mr Miliband announced that, should he end up as prime minister, he would immediately introduce a new tax on tobacco profits to help finance his dreamy plans for the NHS. Case closed.
But it isn’t just the cigarette makers Mr Miliband had a go at. He has also effectively made something else in the UK an unsustainable long-term investment – high-value property.
A tax or the threat of a tax automatically brings down the value of a house. That’s because prospective buyers (and their mortgage lenders) looking to buy a nice London townhouse or mini country estate are likely to add two new factors into their (low) offers.
First, they will work out the present value of the long-term stream of annual payments their purchase commits them to and subtract it from the price they are prepared to pay.
Then, they will knock off a bit more to reflect the fact that, as revenues inevitably fall short, the rates at which the tax is charged are more likely to rise than fall and the thresholds more likely to fall than rise.
That kind of thing seems nuts to us non-political people, but history tells us that it will seem entirely rational to whichever broke politician is in power a few parliaments down the line.
You might think that this will all be a mere blip for the top-end market – after all, for the last four decades most things have been. But it is worth remembering that in shifting tax environments, valuable houses don’t always stay that way. Inheritance tax bills were a big factor in the demolition of over 1,000 country houses in post-war Britain.
Both the tobacco tax and the mansion tax will find relatively wide support in the UK – Labour reckons that most people dislike the very asset-rich, and resent the profits made from nicotine addiction.
They’re probably right. But all this still serves as a nice reminder of last week’s theme: in an age of political interference, any business or sector that wants to be seen as being able to provide long-term sustainable profits needs, as a bare minimum, to be in the good books of both consumers and the government.
I suspect this might also mean it still isn’t the best of ideas to buy long-term holdings in the banks. I wrote about this here some time ago, but the key point is that voters don’t like banks, politicians don’t like banks and regulators don’t like banks.
That’s why, according to the LSE Conduct Costs Project, the top ten banks in the West have paid well over £100bn in fines of one sort or another over the past six years, and why there are many billions to come.
Note that the Financial Conduct Authority and the Serious Fraud Office are investigating a variety of major banks to see if there is evidence of collusion to manipulate foreign exchange rates. Imagine the fines if they find it, and then imagine how little sympathy the banks and their employees will muster on the high street.
The same goes for the bank levy and the banker bonus taxes that Labour have spoken about in the past. Add in new competition in the financial services market – be it from online wealth management or peer-to-peer lending for small companies – and it is hard to see how sustainable is a word you could use for big bank business right now.
Let’s think about what else governments and their voters don’t like much at the moment. One answer might simply be very high pay for corporate executives. You can see this in the recent updating of the UK’s corporate governance code.
It focuses on the idea that companies should align “reward with the sustained creation of value” and hopes that companies will put in place arrangements that will allow them to “recover variable pay” when it is appropriate to do so. Companies that don’t comply have to explain – which could make for some amusing annual meetings.
But as is the case with companies that sell products that kill their customers, avoiding companies that grossly overpay or that offer potentially life-changing piles of share options to their executives should just be common sense to the sustainable investor. There is plenty of evidence that their chief executives under-invest (to stop short-term profits falling, keep share prices up and make their options worth more) and so undermine the long-term viability of companies.
Interesting proof of the way in which short-termism has led to low investment comes from a paper published this year, which found that compared to private firms, listed firms “invest less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news. These findings are consistent with the notion that short-termist pressures distort their investment decisions.” That’s not the kind of company I want to be invested in.
A fascinating paper has also just been published by Warwick Business School, which suggests that the market is well aware of the detrimental effect of too many options on chief executive behaviour: while options tend to make CEOs borrow less to invest, when they do go to the debt markets they find that the more options they have, the higher the interest rate their company has to pay to borrow.
That’s a clear sign debt investors don’t trust them to act entirely with the long-term future of the company at heart. They feel that the chief executive mainly “wants to increase stock price volatility by investing in more risky projects”.
Equity investors probably shouldn’t trust them either. More fund managers are paying attention to salaries than was the case five years ago, but any of them claiming to be investing sustainably for the long term (that is, pretty much every one I ever see) should be paying a lot more attention. Everyone else is.
• This article was first published in the Financial Times.