Home > Trends in Corporate Governance, Voting Rights > Should we favor long-term shareholders? How?

Should we favor long-term shareholders? How?

The Generation Foundation teamed with Mercer and Stikeman Elliot LLP in 2013, in order to do research on what investors and issuers thought about the possibility that loyalty-driven securities could be used as a tool to favor long-term shareholders, with the final aim that society as a whole could avoid the negative effects of short-termism that we would here take as granted. (1)

This was one in five elements previously identified in their article “Sustainable Capitalism”.(2) The new study finds out that the idea is mostly understood but rejected, in favor of some other alternatives to reward patient capitalists.

Some measures that have been proposed (some of them are already applied in France or the Netherlands) include:

–         Shareholder political rights: limiting access or reduce rights of short-term investors; or increasing those of long-term ones, with multiple voting rights that vest in time, or L-shares, (warrants that vest in time and give the right to purchase at a certain price a certain number of shares).

–         Economic rights: financial rewards to long–term shareholders , (for example additional dividends, or bonus shares).

–         Tax breaks or subsidies, (although those escape from the firm`s control, so the study doesn`t focus on it).

Proponents recognize that some registrar should be implemented and perhaps a cap should be established for the additional rights, (for any individual share or as a total of equity rights).

Advocates of loyalty shares argue:

–         They would help establish a long-term shareholder base,

–         Power would be slightly transferred to them, so as to increase their influence,

–         The system would reduce monitoring costs, and it would at least partially compensate for them,

–         The system would increase the identification of shareholders,

–         It would also reduce stocks lending, (that some view as having negative effects),

–         It is a voluntary system to be adopted by companies in their bylaws.

But the survey findings are not so positive for the measure:

–         Those consulted don`t think this measure actually attacks the roots of the short-termism problem.

–         It is also seen as having a strong discrimination effects between two shareholder types. This concentration of power could lead to more entrenchment and lower governance practices. This is one of the main and widely shared critics against dual class shares.

–         If timing is the only criteria, long-term passive investors would be equally rewarded as founders or engaged shareholders, which is counter-intuitive.

–         Other participants showed the concern that the reward would be very low to convince a speculative investor, and is not needed in the case of mutual funds and alike, that by their nature remain invested for long periods. It won`t be effective, so they say,

–         Administrative obstacles seem to be very tough where the system is in place, and have a very relevant cost for companies.

–         The system is said to be easily gamed: investors can receive rewards being “empty voters”; there could be abuses by controlling shareholders;

–         Effectiveness is questioned: first, long-term shareholders are welcome by companies, but not necessarily if the engage and try to influence the management; second, institutional investors would in any case exit the company when the time arrives, whatever the reward is.

–         Where respondents agree on the effectiveness, they clearly favor L-shares or financial preferences rather than political rights use.

As a result of the responses, it is of a great interest to know that some alternative measures were also proposed, and will be the Foundation`s focus in due time:

–         Longer time horizons for investment analysis,

–         Alignment between performance measures and rewards,

–         Stronger relationships between investors and companies.

We will focus on those three possibilities in a future post.

(1)                         The survey results can be found at http://www.mercer.com/attachment.dyn?idContent=1571235&filePath=/attachments/English/131216_Building_a_long_term_shareholder_base.pdf

(2)                         See here:  http://www.generationim.com/media/pdf-generation-sustainable-capitalism-v1.pdf

(3)                         I expressly would like to thank @WillauerProsky, (http://wpwam.com/blog.php), as they provided me with the link in a tweet recently issued by them.

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  1. February 24, 2014 at 11:58 am

    A new post on the same topic, signaling its relevance, by Simon C.Y. Wong, a partner at the investment firm Governance for Owners, an adjunct professor of law at Northwestern University and a visiting fellow at the London School of Economics and Political Science

    http://businessdayonline.com/2014/02/rethinking-one-share-one-vote-2/

    Like

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