61 Pages Posted: 7 Apr 2011 Last revised: 8 Feb 2013
Date Written: April 4, 2011
Market observers and legal commentators link the collapse, a few years ago, of giant energy company Enron and some fabled financial firms to the short-termism phenomenon – investors acting like traders and influencing corporate managers to make policy decisions based on quarterly earnings statements. Opponents of short-termism note that the future well-being of many investors, corporations, overall economy and society at large is in jeopardy if investors with a near-term horizon, especially hedge funds, enjoy a dominant role in corporate governance. Skeptics dismiss the concerns, insisting that the notion of pervasive short-term investing is a figment of opponents’ imagination. Moreover, short-term investors provide needed liquidity and stability to the markets. This paper evaluates three reform proposals to curb shareholder short-termism, namely a securities transaction tax, capital gains tax reform and loyalty dividends. It acknowledges their strengths but notes their weaknesses which caution against creating a situation in which the remedy becomes worse than the malady. Instead, it argues that greater emphasis should be placed on the management side of the equation. The appraisal suggests that effectively addressing short-termism requires an all-hands-on-deck approach that not only includes tackling managerial myopia but also empowers managers to resist shareholder pressure toward an excessive and destructive focus on the near-term. In practical terms, this will involve instituting a corporate norm of long-term shareholder primacy. The norm presents a framework that dissuades managers from their independent short-termism and protects them from shareholder pressure to engage in short-termist behavior.
Keywords: Shareholder Primacy, Short-Termism, Managerial Myopia, Corporate Governance, Loyalty Dividends, Capital Gains, Securities Transaction Tax
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By Tony Edwards