Saturday, 17 October 2009


Via Duncan, I came across the following para in this article.

A transaction tax on financial instruments is very likely. This will raise revenue for governments and make shareholders behave more like owners. Shareholder failure to police risky management activities was largely due to the very short holding periods for equities. A suitably high transaction tax would force investors to hold shares for much longer periods and to engage management to control risk. This would reduce the need for governments to police risk-taking in corporations. What could be more laudable than a tax that turned everybody into Warren Buffett?

A couple of points. Firstly, is it 'very likely'? I don't detect much of a groundswell of opinion behind this idea, right or wrong. But secondly, I do think if the 'shareholder as owner' thing is going to be effective then we probably do need to think about the financial incentives for staying put. The steady drumbeat from the mainstream institutional investor leadership is 'don't make us do this stuff'. And I don't actually see much point in mandating such behaviour (you might as well put your effort into regulating the companies, rather than forcing investors to provide oversight). But we could tilt the playing field a bit so that there was a bit more reason why shareholders might try and engage. And as I said t'other day, my own preference would be to positively incentivise holding for the long-term.


Mark Still News said...

The workers should own the fruits of their Toil, not some fat pig shareholder, this is theft from the working classes who produce the wealth!

Tom Powdrill said...

well, that's one way of looking at it...!!

The Great Simpleton said...

As a matter of interest, what is the difference between an activist shareholderlike, say, KKK, and the type of shareholder involvement you envsiage? Shouldn't they both be inetersted in extracing maximum value?

Tom Powdrill said...

presume you mean KKR!

If so, theoretically yes, private equity ought to address a lot of these issues because the portfolio is more concentrated, holding period much longer etc. Indeed many private equity people argue that their model overcomes the governance failings in the public market.

That said we have obviously seen in recent years that private equity can have serious flaws too. It will be interesting to see how well some of the LBOs undertaken in recent years turn out (ie was leverage a key factor in previous returns).

The Great Simpleton said...

Ooops, yes I did mean KKR!

I was also thinking more of the way some of the PE firms can target a company buy and try to force management into selling off, what they consider, under performing assets.

Tom Powdrill said...

it does happen in public companies too, but less so.

theoretically it ought to be the the big index-tracking managers like L&G and Barclays that have the most interest in resourcing this kind of thing, because exit isn't an option. in practice it seems they devote less to it than active managers.

Cantab83 said...

"Shareholder failure to police risky management activities was largely due to the very short holding periods for equities."

I find this point rather curious, if not puzzling. Is it really true?

Firstly, not all shareholders hold their shares for very short periods. My main query, though, is this. Of those that do hold shares for short periods, what happens to the voting rights of those shares?

(a) Are they unable to be exercised, and therefore the holders are effectively disenfranchised?
(b) Are those rights impossible to exercise by the short-term holder, but instead revert by default to either the company board or some other proxy agent such as the brokerage firm that the shares were leased from?
(c) Can they (the short-term shareholders) and do they exercise those rights, but without due diligence, the result being that they just vote with the recommendations of the board?

If the answer is (b) or (c) then I can see that the quote above may contain an element of truth. But my suspicion is that the answer is more likely to be (a). If so then disenfranchising short-term shareholders actually has the opposite effect to that claimed. It increases the relative voting power of long-term shareholders. So if there is a failure, maybe we need to look elsewhere? Or am I missing something?

The other two issues that need quantifying are how short is short-term, and what fraction of shares come into this category?

Tom Powdrill said...

Hi Cantab

On voting the short answer is that as long as the shareholder holds shares at the point at which votes need to be cast, they can vote. In some other European markets they have system called 'share blocking' where you are prevented from trading for a given period leading up to the company meeting if you wish to vote your shares. But in the UK this doesn't apply. So short-term investors aren't disenfranchised here.

Actually the sort of ideas that Paul Myners has been floating would introduce exactly such a tilt in favour of long-term investors (ie greater voting rights once you've held the shares for a set period etc).

Personally I don't think the problem is with short-term investors, however defined. There are some big long-term investors out there who rarely vote against management. Therefore the real issue IMO is how to get them to think of themselves as owners, if that is possible. Whilst I'm in favour of incentivising long-term investment, that only takes you part of the way.

As to what constitutes 'short term' I don't think any is really using a specific timeframe.