13.07.2012
By Simon Miller
Shareholder short-sightedness is causing short-termism decision making in the corporate world according to consultants, academics and pension fund trustees.
According to professor of corporate and business law at Cornell University Lynn Stout there are structural flaws in the capital markets that are forcing company executives to take short-term decisions.
Speaking at ReSource 2012, Stout pointed out that, in the US at least, there is no legal imperivate to maximise shareholder value.
"What we have are deep structural problems. Average holding period for shareholdings is down from eight years to four months today while there is a change in law in the US so that shareholders have more power to pressure boards and executive pay is more based on shareholder value," she said.
Stout continued: "It is an investment tragedy. A shareholder may try and realise a long-term strategy but are up against others looking to maximise returns in 12 months and becomes a race to the bottom.
"It's like fishing with dynamite. If you don't fish with dynamite but others do, you end up with less fish."
BT Pension Scheme trustee Donald MacDonald asked: "Is capital markets operating like they are meant to? If you are meant to believe that capital markets are meant to match capital how do you explain Glencore, which appears to have listed for a merger, or the listing of Facebook?"
He added that asset owners such as pension funds had to have long term horizons because of their liabilities. However, they have to look at their own behaviour.
"Asset managers believe that they do not have a long-term mandate from owners and it is up to them to drive through these changes," he said.
This short-termism seems to have been confirmed by research from consultants McKinsey.
Speaking at the conference, McKinsey director Conor Kehoe said many trustees were nervous about doing the right thing for long-term decision making.
He commented: "Many trustees are lay people and nervous about doing the right thing and seek advice but are keen to show due diligence and compliance. So managers may find themselves thinking they are on a one-year contract due to diligence checks rather than investing for the long-term."
He added: "And there is also this tendency that puts short-term pressure on the board. Many non executives say that compliance is the first step to take because their personal reputation is at stake."
Hertford College principal Will Hutton criticised the use of derivatives as part of this short-termism saying that there had been a culture developed that allowed investors to think they could mitigate risk.
He commented: "There is an imagined view that the shareholder can mitigate risk. The reason why the financial services got so big is that we thought that we could mitigate risk. The equity markets cannot offset risk but, certainly the Anglo-Saxons, continue to think this so they develop investment instruments that paradoxically shortened the long-term investment principle."
Stout believes that the introduction of some form of transaction tax was vital for the reintroduction of long-term decision making by corporations.
She commented: "We need to increase the costs of short term trading up to increased long-term holdings."
Hutton agreed and added that executives should have part of their bonuses withheld for three years and would have to "earn it back" through performance.
"We need to get some grit in the wheels," he said.
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