The missing role of controlling shareholders in the short-termism debate

Abstract

Corporate short-termism, i.e., corporations sacrificing long-term value for short-term profits, has received a lot of attention in the corporate governance literature. However, the role of controlling shareholders in the short-termism debate has remained understudied, possibly because of a focus on US and UK governance systems. This paper addresses this by comprehensively analyzing the impact of controlling shareholders on the short-termism problem. Two conceptual hypotheses of short-termism are presented, one where short-termism originates with institutional investors, and one where it originates with managers and directors. The paper then shows how controlling shareholders can eliminate short-termism in both hypotheses, but only if controlling shareholders themselves are not excessively short-term oriented, which depends on the type of controlling shareholder. The paper concludes with some policy implications, including with regard to loyalty voting rights and dual class share structures.

Keywords: Short-termism, controlling shareholders, agency problems, private benefits of control, family firms, loyalty voting rights