LONDON The government will try to encourage equity investors to take a longer-term view of shareholdings and break away from a "quick-buck mentality", Business Secretary Vince Cable said on Wednesday.
Equity investment needed to be "recalibrated" to support the long-term interest of companies and underlying beneficiaries, such as pension fund members, he said.
"There are a lot of issues raised and we can't ignore them because Britain needs long-term investment," Cable told the Association of British Insurers in London.
The "acid test" will be whether longer-term investment yields better returns as suggested by Bank of England research, Cable said.
Economics commentator John Kay would lead a review into investment in Britain's stock markets and examine the role of pension funds, pensions advisers and fund managers, Cable said.
The review will report preliminary findings at the end of this year, and produce a final report in 2012.
It will examine "how best to ensure that the timescales over which companies and fund managers operate match the interest of clients and beneficiaries".
It follows an examination of corporate governance launched by Cable last October in response to the controversial 2010 takeover of British confectioner Cadbury by U.S. rival Kraft Foods KFT.N.
"The growing demand for early returns has serious implications for investment in longer-term projects, such as improvements to infrastructure networks or the development of new technologies, which by their very nature only produce a return over a period of many years," Cable said.
"Such projects may not fit with the quick-buck mentality that appears to be gaining in popularity, but they are essential in facilitating the UK's long-term growth."
London is home to Europe's biggest stock market. The Investment Management Association said the review gave an opportunity to examine the needs of investors and companies and ensure excessive value is not being extracted by intermediaries.
But Robin Johnson, of law firm Eversheds, said politicians getting involved in the governance relationship between investors and companies was not the right way to progress.
Britain's Takeover Panel is also considering tougher merger rules in the wake of the $18 billion Cadbury deal, which critics said was driven by investors seeking a quick return and was not in the long-term interests of Britain's economy.
Sky-high remuneration and the need to show immediate results, however illusory, were driving short-term profitability with investors better off if they invested in government bonds rather than shares over the past decade, Cable said.
The total pay of Britain's FTSE 100 blue-chip companies last year was 120 times that of the average UK employee, up from 45 times in 1998, Cable said.
"Ridiculous levels of remuneration are going unchallenged as the norm, as there is no correlation with performance," he said.
He will launch a consultation next month on toughening up company disclosures on executive pay and pensions, and their links to company performance.
He will meet with remuneration committee chairs on policy options and will announce further action in the autumn.
He also urged companies to announce by September their targets for increasing the number of women board members while the government was still "looking at progress through a voluntary approach".
(Reporting by Tim Castle and Huw Jones; Editing by Will Waterman and David Hulmes)