Britain needs wider share ownership

Foreign institutions are buying up more and more of Britain's companies. And that matters far more than most people realise, says Matthew Lynn.

Who owns Britain? According to the latest figures, it isn't you or me. It isn't even the big insurance and pension funds, although they have a far larger slice of it than ordinary individuals. Increasingly, it is foreign institutions. And that matters far more than most people realise. In the 1980s, Margaret Thatcher's Tory government campaigned for wider share ownership. It's time some of those ideas were revived. The Office for National Statistics last week published data that showed ownership of UK quoted firms has changed significantly in the last few years. Individuals now own just 10% of the shares quoted on the London market, down from 13% in 2006, and from 54% in 1963. That is an all-time low.

Meanwhile, the proportion held by foreigners has risen dramatically. Foreign investors now account for 42% of London-listed shares, compared with 28% back in 1997. Insurance companies account for 13%, while 'other financial institutions' (mainly hedge funds) account for 10%. The balance is made up of unit trusts, charities, and, rather ominously, the government, which now owns 1% (mainly Royal Bank of Scotland hardly the basket you'd want all your eggs in). It's true that individual share ownership has been on a steady downward trend ever since the figures first started to be published in the 1960s. In part, that reflected the rise of the big unit trust and pension firms, which owned shares collectively. In the 1980s and early 1990s, however, the percentage at least held steady at around 20%. But under this government, it has halved again. On current trends, it will expire completely in another decade.

Of course, it's understandable that most investors are fed up with buying shares. It's been a miserable decade for equity investors. Unless your timing is great, you'd have lost money. And the tax breaks on individual savings accounts (Isas) have been steadily whittled away, making share ownership gradually less attractive. Instead, people piled into property, or just spent all their money. But just as we did in the 1980s, we should be trying to get more people to own shares. Here's why.

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First, it gives people a stake in the system. As Thatcher saw clearly, people will only support a free market, capitalist economy if they feel they are a part of it. Over the last decade, the government has steadily loaded more and more taxes onto business, either directly through higher payroll charges, or else indirectly, through regulations that grant more and more rights to workers. If people don't have any stake in a business as shareholders, they will probably ignore this trend after all, it's better if someone else pays tax rather than you. But if they can see every new corporate tax lowering the value of their shares and reducing their dividend income, they are more likely to notice and object.

Next, all the evidence suggests that individual shareholders are far more willing to support firms in the long term. Meanwhile, foreign investors happily move into and out of the UK depending on the quality of a PowerPoint presentation in Boston or Beijing. Private investors tend to buy and hold, not because they are intrinsically patient, but because they don't have the time or interest constantly to shuffle their portfolios around. Sure, nobody wants to see restrictions on takeover deals. But firms do best when they have patient, supportive, shareholders, who allow managers to focus on the long-term, without having to worry too much about next-quarter's results, or designing some fancy piece of financial engineering that boosts the share price.

Finally, after a decade in which it was puffed up with debt and a tidal wave of public spending, Britain is going to have to develop new industries to get itself growing again. Capital will be in short supply. Savings are low, and the government will be borrowing most of the money that is available. So private shareholders will be one of the few sources of fresh capital for the new, entrepreneurial firms the UK needs to encourage. And the government can do two things to help.

It can restore tax advantages. The tax breaks on an Isa have been sliced away so that they are virtually meaningless for standard-rate taxpayers. Why not offer tax relief on contributions, just like a pension, and raise the annual contribution limit to £15,000? That would give people a powerful incentive to build up a portfolio of shares, rather than just putting all their money into property. Indeed, why not make dividends on shares in UK firms income-tax-free after all, corporation tax has already been paid on the profits being distributed. Next, when the banks are privatised, use it as an opportunity to spread share ownership. Selling off the utilities in the 1980s wasn't just about raising money. It was about changing attitudes towards business. Why not give everyone free shares in RBS, for example, and then make them tax free if held for five years?

In a globalised economy dominated by big investment funds, we'll never return to the levels of individual share ownership of the 1960s. But 10% is shockingly low and if it could be nudged up, it would help fix some of the economy's problems.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.