Wednesday, 14 March 2007

Do investors really believe in long-term shareholder value?

There's a very interesting issue coming up at the AGM of the Dutch company DSM later this month. The company has proposed paying a 'loyalty dividend' to investors who hold its shares for at least three years. Those that do will qualify for an initial 30% bonus after 3 years and a further 10% for each additional year the shares are held. It's not big bucks but it is enough to provide a little bit extra to those who back the company over the long term.

The company's stated objectives behind this proposal are to strengthen its relationship with shareholders who have along-term perspective, and to improve communication with investors by having a clearer idea of who actually owns the company's stock. You can read the company's full explanation here. So far so good, and it sounds like quite an innovative idea to deal with the short-term trading that often unsettles companies.

However the proposal has actually created some division in the investment community. Some have argued that the proposal is a defence mechanism, others have said that it goes against the principle of equality of treatment of shareholders. One US mutual fund manager has gone as far as to threaten to sue DSM. The proxy voting agencies are also split. Global behemoth ISS has recommended a vote against the proposal, whilst the ECGS has come out in favour.

I have to say I have no problem siding with the company on this one. As employee-investors surely we want good companies to prosper, and recognise the need to provide a stable environment for them to do so. The proposed dividend does not affect the ability of investors to trade the company's shares, or lock them into ownership, it merely rewards those who stay the course. I think those investors who oppose the proposal give them impression that trading is the most important question. It's a warped interpretation of shareholder value in my view.

The company's AGM is on 28 March and it will be very interesting to see how the vote goes. Trustees who are interetsed in long-term investing would do well to find out from their fund managers what stance they intend to take.


Tom said...

In my view, ideas like that represent the long term future of capitalism, ie. transformation into something stable, equitable and reflective of hard growth. Opportunistic and short-term trading sucks, because it becomes distant from the nature of the commodity.

Why treat shareholders equally when some are more socially beneficial than others, in the large scale?

Tom Powdrill said...

I think that's right. There wil no doubt always be short-term trading, because some people will always think they can make money that way (I have serious doubts about that!).

But opposing an idea like this is effectively prioritising trading over the company's interests. The share and the ability to trade it becomes more important than the business of which it is a part.