Thursday, 11 February 2010


A couple of related bits on short/long-termsim. First, Pesto has blogged about recently ex-Cadbury chair Roger Carr's remarks about hedge fund involvement in the Kraft bid. Here's what he had to say:
"It was the shift in the [share] register that lost the battle for Cadbury. The owners were progressively not long-term stewards of the business but financially motivated investors, judged solely on their own quarterly financial performance...

"There were simply not enough shareholders prepared to take a long term view of Cadbury and prepared to forego short term gain for longer term prosperity...

"At the end of the day, individuals controlling shares which they had owned for only a few days or weeks determined the destiny of a company that had been built over almost 200 years."

He reportedly went on to argue that the right to vote should be restricted to those have held shares for a given amount of time. This is an idea that Myners has floated previously. I also think there is a good argument that companies could use dividend policy to encourage long-term ownership. I know some investors don't like these sorts of ideas and that equal treatment of shareholders being something of a point of principle, but I suspect that this isn't such a strong argument anymore. So I reckon we might see more policy interest in some sorts of incentives for long-term holders.

Separately, in the IRRC/Mercer study there is a short section looking at potential remedies for short-termism. The interesting thing is that fund managers themselves float ideas (unprompted) that you might not expect, like a transaction tax. Worth a read.


Andrew Curry said...

The convention of equal treament of shareholders assumes that there's no externalities from such treatment. Increasingly we know that there are - I'm wondering what the environmental principle of 'placing the waste pipe upriver of the factory' (to make them discharge clean water) would be in the case of feral shareholders such as headge funds.

The Great Simpleton said...

The problem with the long term is that it is based on forecasts and projections whose error margins increase over time. They are also subject to unknown unknowns as the saying goes ie political risks, regulatory changes and even fickle fashions.

There comes a time when the certainty of a short term gain becomes preferable to the risks associated with the longer term, even if the longer term does appear to have improved gains.