The long-term financing of the EU economy

Comments from ACCA to the European Commission, 20 June 2013.


ACCA welcomes the Commission’s publication of the Green Paper and supports the goal of creating a business environment which promotes a more long-term focus in planning and investment. 

We welcome the Green Paper’s comprehensive analysis of the present situation, one which takes into account a wide range of variables that have a bearing on the issue under review. There is one aspect that we feel receives inadequate attention, and that is the current and potential future role of equity finance. The changing nature of public and private capital means that it is extremely difficult now for businesses to finance growth by debt. Financing today’s technology-based businesses is typically only possible through equity, and for this reason this channel of funding should assume a greater role in the Commission’s financing strategy. Given the hope being invested in the private sector, and especially SMEs, to spearhead the return to growth, wider access to equity funding for the SME sector should be an important element of any long term strategy. 

Another significant dynamic which we believe the Commission must acknowledge in its plans is the capacity of private businesses to plan effectively to meet their financial needs and manage their affairs on an on-going basis. Research undertaken in the UK suggests that businesses that have financially trained staff and are able to produce regular management accounts are more likely to be successful when applying for finance. Yet only a minority of SMEs have trained staff and produce regular accounts, and even fewer produce, additionally, business plans. There is also evidence to the effect that innovative projects are more likely to fail because of internal financial management defects than due to a lack of external funding. Accordingly, any comprehensive strategy on this issue needs to emphasise the need for strengthening the financial capability of SMEs. 

With regard to the Commission’s interest in exploring whether current technical standards on fair value accounting contribute to an undesirable focus on the short term, it must be recognised that the purpose of these standards is to provide information which is decision-useful for investors. Fair values are always likely to be appropriate in respect of financial investments, especially for equities, since those values are likely to be up to date and reflect current investment options. The alternative basis of valuation, historical cost, is not a good alternative where reliable fair values are available – the longer the investments are held, the more irrelevant that cost model would become.

We agree that the supply of and access to long-term financing is a necessary prerequisite for the adoption of long-termist business strategies. We would not wish to suggest though that the long term focus is or should be the required norm in all circumstances. Individual enterprises and investors may well have different time horizons, and these should be respected. In a diverse business environment, it should be seen as healthy for entrepreneurs to be able to create and manage companies to achieve short term objectives. Also, whatever the time horizon of individual businesses, it is likely that most will have a range of capital needs, and short-term liquidity financing will in all likelihood be a prominent element of those needs. In seeking to enhance the long term perspective in planning and investment, the contribution that short term funding can make to sustaining business activity should not be devalued. 

The above notwithstanding, the recent financial crisis has shown that any business which aspires to being successful over the longer term must consciously adopt strategies to bring this about and have access to sources of funding which facilitate them. We support efforts to encourage and push companies to do this. Goals and targets which appear to be attractive in the short-term should be considered to be secondary to the goal of creating value in the longer term, and companies should be encouraged in different ways to appreciate the business benefits of planning for sustainable growth. Rules on the ways that businesses are governed and managed, and report on their performance, make up part of the framework that can help achieve this outcome. 

To bring the desired change about will require not only action by companies but supportive behaviour by investors, market players and wider society. The business environment in general must develop in a way which is not characterised disproportionately by an expectation of immediate results. Investment activity which is intended to generate income for expressly long term purposes, in particular pension saving funds, should adopt a much clearer focus on the long term. And on a wider political level, it has to be accepted that a greater concentration on the longer term will inevitably mean businesses and individuals foregoing consumption in the short term and, if necessary, imposing regulatory restraints on business activities which offer the prospect only of short-term or socially irresponsible profit. 

ACCA's full comments [see Related documents] address only those issues and questions that are of direct relevance to ACCA's remit.