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3 March 2022

Inequality, firms, ownership and governance

The UK has experienced an exceptionally low level of productivity historically and internationally since the financial crisis of 2008. This is reflected in a marked variation in productivity across firms by size, age and sector. In particular, there is a high regional variation in productivity across the UK with substantial disparities between the South and East, and the rest of the country. This in turn is associated with considerable regional income and wealth inequality. Alongside its poor productivity performance, there has been an exceptionally low level of business investment (fixed capital formation) and high regional variation in R&D.

In this commentary, I suggest that two factors have contributed to this record. The first is the financial system and the funding of, in particular, small and medium-sized enterprises (SMEs). Having once successfully funded the Industrial Revolution through a local banking system, the UK now has a highly centralised banking sector that provides predominantly short-term working capital. As a result, SMEs are dependent on equity sources to fund their growth and expansion. However, a large proportion of this goes to firms in the south-east of the UK and there has been a failure to connect pools of capital in London with the regions.

The second factor is the ownership and governance of firms. The UK has an exceptionally dispersed form of ownership of listed companies and an absence of owners of significant blocks of shares. Furthermore, having once had locally based individual shareholders, holdings of shares have moved progressively from domestic relatively long-term institutional investors to global short-term asset management firms. The result has been the demise of long-term domestic, locally based shareholders.

The consequence has been that the UK has extinguished both local-based banks and local shareholders that had close relations with companies they financed and owned. Instead, finance, ownership and governance have become highly centralised and disconnected from business. The result is a high level of regional disparities in financing and governance, and the replacement of long-term relationships between investors and firms with short-term, transactional engagements. Those engagements have become increasingly focused on shareholder returns at the expense of the interests of other parties, with adverse consequences for aggregate productivity, diffusion of productivity gains between firms, inequality within as well as between firms, and regional disparities.

Cite this as:

Mayer, C. (2022), ‘Inequality, firms, ownership and governance’, IFS Deaton Review of Inequalities,