L-Shares: Rewarding Long-Term Investors

45 Pages Posted: 13 Dec 2012 Last revised: 24 Feb 2013

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Frédéric Samama

Sciences Po, S&P

Date Written: November 1, 2012

Abstract

We argue that a fundamental reason for the short term perspective of corporate executives is the short-term orientation of shareholders and financial markets that drive the performance benchmarks of CEOs. In our view, long-term committed shareholders can provide substantial benefits to the company they invest in and although some shareholders are prepared to take a more long-term view, they are generally not rewarded for their loyalty to the company. We believe that because they are a scarce resource and provide benefits to the company and other shareholders that have all the features of a public good, long-term shareholders need to receive financial incentives. While lengthening stock option vesting periods and introducing claw-back provisions into CEO compensation contracts help induce a more long-term orientation of CEOs, we argue that it is also necessary to reinforce this more long-term performance-based compensation with a better alignment between shareholders and CEOs horizons. Our proposal for moving towards such an alignment is to introduce Loyalty-Shares (or L-shares). These shares provide an additional reward (usually under the form of an extra-share or extra-dividend) to shareholders if they have held on to their shares for a contractually specified period of time, the loyalty period. The reward we propose, which we believe would be a more optimal solution in many cases, is in the form of a warrant giving the right to purchase a pre-determined number of new shares at a pre-specified price and granted to loyal investors at the expiration of the loyalty period. This paper discusses how L-shares under the form of loyalty warrants can be structured and distributed, how they may be valued and how they may affect liquidity and control of the corporation.

Keywords: Exit, Voice, Loyalty, Long-term Investors

JEL Classification: G20, G21, G24, G28, G32, G34

Suggested Citation

Bolton, Patrick and Samama, Frederic, L-Shares: Rewarding Long-Term Investors (November 1, 2012). ECGI - Finance Working Paper No. 342/2013, Available at SSRN: https://ssrn.com/abstract=2188661 or http://dx.doi.org/10.2139/ssrn.2188661

Patrick Bolton (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Frederic Samama

Sciences Po, S&P ( email )

40 Rue de Courcelles
Paris, 75017
France

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