UK Looks at Short-termism

UK’s Secretary of State for Business, Vince Cable, launched a consultation into corporate governance and whether failures in that process are stoking a trend for short-termism in investment that damages the long term interests of companies and many of their investors.

Vince Cable, BBC photo

The consultation will examine allegations that publicly quote companies are being run in order to create short-term spikes in share value, rather than for the long-term benefit of the company, the economy and its longer term shareholders. Said Cable,

The paper I am issuing today is a call for evidence from across the corporate world and beyond to examine whether the system in which our companies and their shareholders interact promotes long-term growth – or undermines it. I want a serious examination and debate into the role of investors and the time horizons over which they operate; the factors influencing board decisions; the reasons for the growth of directors’ pay; the impact of the investment chain; why returns from equity have reduced; and why takeovers that are economically damaging still take place.

Comments can be submited via “the response form.” The form can be submitted by letter or email to: Adam Gray Long-term Focus Consultation Corporate Law and Governance Department for Business, Innovation and Skills 1 Victoria Street London SW1H 0ET clgconsultations@bis.gsi.gov.uk.

The consultation provides a nice very brief overview of history and regulatory framework. Key questions posed include:

1. Do UK boards have a long-term focus – if not, why not?
2. Does the legal framework sufficiently allow the boards of listed companies to access full and up-to-date information on the beneficial ownership of company shares?
3. What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
4. What are the most effective forms of engagement?
5. Is there sufficient dialogue within investment firms between managers with different functions (i.e. corporate governance and investment teams)?
6. How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publically how they have voted?
7. Is short-termism in equity markets a problem and, if so, how should it be addressed?
8. What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions? What are the benefits and costs of possible actions to encourage longer holding periods?
9. Are there agency problems in the investment chain and, if so, how should they be addressed?
10. What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
11. What are the main reasons for the increase in directors’ remuneration? Are these appropriate?
12. What would be the effect of widening the membership of the remuneration committee on directors’ remuneration?
13. Are shareholders effective in holding companies to account over pay? Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?
14. What would be the impact of greater transparency of directors’ pay on the linkage between pay and meeting corporate objectives performance criteria for annual bonus schemes relationship between directors’ pay and employees’ pay?
15. Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
16. Should the shareholders of an acquiring company in all cases be invited to vote on takeover bids, and what would be the benefits and costs of this?

This seems to me to be a very positive step. I’d like to see the SEC in the US issue a concept release, perhaps even more focused on the issue of short-termism, or perhaps this is something their yet to be reconstituted Investor Advisory Committee could initiate. I think we’ve been too focused on liquidity and not enough on encouraging long-term investment.

Also of interest, UK Takeover Panel Publishes Review of Takeover Rules (HLS Forum on CorpGov and Fin Reg, 10/30/2010). “amendments to the Code will clarify that target boards may “take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders,” primarily employees of the target company.  Offeree companies will “not be limited in the factors they may take into account in giving their opinion” on a bid, and the Code will be amended to require disclosure of additional information so that “the offeree company board and all other interested constituencies [can] consider the long term effects of an offer on the merged business in all circumstances.”