Incentives to counter short-term investing?
Researchers are studying the idea of using incentives to encourage investors to hold shares for months or years, an effort to counter “short-termism” in investing that some say is damaging the way companies are managed.
A global research project launched Wednesday by Mercer, Stikeman Elliott LLP and the Generation Foundation will look at the concept of granting “loyalty” dividends or warrants, or additional voting rights, that would “reward” certain corporate shareholders for retaining their shares for a specified number of months or years.
“While we do not have all the answers, we do have some ideas we think may work, such as incentivizing longer-term, engaged ownership,” said Peter Knight, partner at Generation Investment Management and trustee of the Generation Foundation.
“By commissioning Mercer to undertake this consultation, the Generation Foundation wants to see if this idea has merit among key stakeholders.”
While we do not have all the answers, we do have some ideas we think may work
Jane Ambachtsheer, Mercer’s global head of responsible investment, said the project, which is to be completed in the fall of 2013, should provide “a much better sense of whether and how incentives could be utilized by a broader range of issuers, and if not, why not.“
Mercer is leading the project with support from Canadian law firm Stikeman Elliott. The research will involve tapping investors, legal and academic experts, and representatives from corporations through interviews and focus groups.
Concerns about short-termism in capital markets — sometimes called quarterly capitalism because of prompt stock-price reactions to three-month earnings reports — have intensified with a rise in high-frequency trading.
Critics say the lightning- fast, computer-driven trading where profits are made in fractions of seconds from tiny price differences across stock markets has disconnected movements in stock price from a company’s business fundamentals.
While there is much debate on the topic, a report commissioned by the United Kingdom published in July noted differences between investing and trading, with the latter done on the basis of expected short-term movement in a company’s share price.
A response from the U.K. government a couple of weeks ago said the analysis by professor John Kay “demonstrates that investment strategies based on trading to benefit from expected share price movements cannot improve the underlying performance of companies, and can instead create incentives on company executives which undermine long-term value creation.”