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

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Frédéric Samama

SWF Research Initiative, Amundi

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)

Columbia Business School - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

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 ECARES ULB CP 114
B-1050 Brussels
Belgium

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

Frederic Samama

SWF Research Initiative, Amundi ( email )

91-93, boulevard Pasteur
Paris, 75015
France

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