Saturday, 20 February 2010

Voting & long-termism

There's an interesting piece on the Economist website about possible ways to encourage long-termism. It tends a little too much towards the conventional wisdom that the best outcome it one share no vote with no exceptions. I'm not convinced by the idea of differential voting rights, but I'm inclined towards some sort of qualifying period for voting rights. And as I've said before I like the idea of trying to use dividend policy to encourage long-termism.

None of this would guarantee that outcomes would be any better. But I do think companies should be allowed to experiment, whereas they are often faced by a rather fundamentalist stance from shareholders. In addition, I do think that shareholders who had held their shares for a period to qualify for whatever kind of loyalty benefit and who then challenged the management would send a very strong message. Much stronger than talking the language of long-termism but then pushing for structures that suggest investors' focus is primarily on liquidity. The two things don't sit well together.

That said I agree with the final comment in the Economist piece:
Better yet, the investing public, whose retirement savings have atrophied in the financial crisis thanks in part to the short-term way in which they were invested, may sort things out themselves, by demanding a longer-term perspective from the pension and mutual funds that they have entrusted with their money.

If that ever does happen I think we can say for certain that investing intermediaries would need to seriously entertain some of these sorts of structural incentives for long-termism. I didn't see Cadbury workers lobbying for hedge funds to have unrestricted voting rights...


Andrew Curry said...

The problem is that the idea of the joint-stock company - which is what we still have - was not really designed for a world in which the interests of finance capital were so dominant. It was a legal device to encourage investors to pool funds in innovative and sometimes risky ventures.

Perhaps we need to imagine what form of governance can recreate that initial (and broadly useful) outcome?


Tom Powdrill said...

Hi Andrew

Yep, it's a very interesting time in the governance area, lots of issues that were once seen as settled are back in play in a big way. The recent interest in co-ops (which I haven't commented on at all really) is one example, but there are plenty of others.

I'm personally tending towards the 'let a hundred flowers bloom' approach to it as I see no optimal model out there.