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• Short-term behaviour by investors is seen as damaging the way companies are managed
• Research shows little support for loyalty rewards for changing “short-termism” problem
• Three interconnected themes identified as alternative solution
Mercer, Stikeman Elliott LLP and the Generation Foundation (the advocacy group of Generation Investment Management) announced today the release of its year-long collaborative global research consultation with key investment stakeholders regarding ways corporations can build long-term shareholder loyalty. The report, entitled Building a Long-Term Shareholder Base: Assessing the Potential of Loyalty-Driven Securities, reveals that while investors, corporations, fund managers, academics and other thought leaders broadly agree that short-term investment behaviour does have a negative impact on the way companies make key decisions, there is little support for the introduction of loyalty rewards (i.e. loyalty dividends, warrants or additional voting rights). More than 100 leading investment managers, asset owners, corporate directors and industry and academic experts participated in the consultation.
“We conducted in-depth discussions with stakeholders from the full investment chain about the problem of short-termism and ways to address its root causes,” said Jane Ambachtsheer, Mercer’s Global Head of Responsible Investment. “The important take away is that the investment community as a whole does see short-term behaviours as detrimental to good corporate governance and therefore investment performance, signaling that the issue needs to be addressed. There is growing momentum behind the belief that solutions are needed to better align beneficiaries, fiduciaries, investors and companies. For fiduciaries, this could include more actively considering their philosophy towards shareholder engagement. There was not, however, broad support for loyalty rewards as the proper means to achieve this goal.”
Respondents identified four main obstacles in utilising loyalty rewards as a means to overcome the root cause of the short term pressures found in the full investment chain:
1 – Discrimination between shareholders due to belief in “1 share, 1 vote”
2 – Risk of unintended consequences
3 – Administrative complexities
4 – Uncertainty that loyalty driven securities would incent a significant change in behaviour and address the root causes of short-termism
The consultations also looked into what could be done beyond loyalty shares to solve the short-termism dilemma. Discussions on alternative solutions centered on several themes:
• A longer-term perspective and focus on economic value creation is only possible if supported by appropriately aligned performance measurement and reward frameworks.
• A more constructive relationship between companies and their long-horizon investors is required.
• Now is the time to move beyond discussion and move towards implementing these revised systems and frameworks. In recent years, the quantum of research and industry events has focused theoretically on how to better align beneficiaries, fiduciaries, investors and companies. We now need action.
• A further focus on how policy and regulatory frameworks help or hinder desired behaviour conducive to long horizon value creation is warranted (by investors and companies alike).
“While our report clearly recognizes a growing need for investors to take a longer-term view, the incentives for myopic leadership remain acute,” said Ed Waitzer, a Partner at Stikeman Elliott LLP and a co-author of the Building a Long-Term Shareholder Base report. “The themes that emerge from the research reflect a collective desire to get beyond aspirational talk to truly collaborating about how to address the identified challenges. There was also recognition among respondents that, to the extent the investment community does not do so, legislators and courts are increasingly willing to intervene in response to the ‘reasonable’ expectations of stakeholders.”
David Blood, Senior Partner at Generation Investment Management said, “It is encouraging that there is a growing consensus across the business and investment community that taking a longer term view inevitably creates more value. The challenge now is how best to harness this broad support for long termism, push forward with real and decisive actions, and ultimately create a more sustainable form of capitalism.”
About the research
As part of the research process Mercer and Stikeman Elliott LLP spoke to more than 120 individuals representing a variety of perspectives from a range of backgrounds and expertise. The group included 41 asset owner organisations, 43 investment management organizations, 24 publicly-listed companies in the US, Canada, Australia, United Kingdom, the Netherlands and France, as well as representatives from proxy voting advisory firms, corporate governance advisory firms, securities regulators and securities law firms, as well as a number of academics and other well-known thought leaders.
About Stikeman Elliott LLP
Stikeman Elliott LLP is one of Canada’s leading business law firms, with offices in Toronto, Montréal, Ottawa, Calgary, Vancouver, London, New York and Sydney. For more information, visit www.stikeman.com.
About The Generation Foundation
The Generation Foundation was part of the original vision of Generation Investment Management LLP (the ‘LLP’) when the firm was founded in 2004. Charged with the mission of strengthening the field of Sustainable Capitalism, the Foundation’s principal platform for activity is a partnership model whereby we collaborate with individuals, organisations, and institutions in our effort to accelerate the transition to a more sustainable form of capitalism.
About Generation Investment Management
Generation Investment Management LLP is dedicated to long-term investing, integrated sustainability research, and client alignment. It is an independent, private, owner-managed partnership established in 2004 with offices in London and New York.
Generation seeks superior performance by taking a long-term investment view and integrating sustainability research within a rigorous fundamental analysis framework. The sustainability research plays an important role in forming its views on the quality of the business, the quality of management and valuation. Its performance fees align its interests with that of its clients by being based on long term performance.
Generation Investment Management LLP is authorised and regulated in the United Kingdom by the Financial Services Authority.
Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 42 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,700 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerInsights