With a shift to long term outcomes, one could do any number of things that are short term bad to line their pockets and claim the benefit is further down the road. The problem isn't really about short or long term goals - does Amazon or Tesla give a rats ass about profit next quarter? No, and IMHO one of those is a solid company while both have high valuations.
In some cases I think the answer is to strip investors of control. They are the ones allegedly pushing short term profits at the expense of the long term. But what is ownership if not a form of control?
Another thought I keep coming back to is dividends. A proper investment gives returns without having to sell your stake. Lets provide incentives for companies to share profit rather than pump stock prices, then everyone can get excited about the right things. This has its downside too in cases where growth may require reinvestment. Perhaps forcing dividend payments for all cash equivalents above some threshold? I dunno, there are a lot of ways to approach this and none of them are good for all companies.
Hopefully this was a very fleeting thought; when it comes to ideas about changing corporate structure you couldn't really come up with a worse one. It is a complete violation of the skin-in-the-game principle that has so successfully propelled capitalist society for more than 200 years.
If management aren't accountable to the wishes of people who have proven they can preserve or grow piles of money, there will be economic waste on a colossal scale compared to what we have now. Corporate management would be overwhelmed by fast talking con men.
Turn your attention instead to the forces that are making short term decisions the better ones. I'm no expert, but if short-term thinking has been going on for a long-term time then something is more fundamentally wrong than "gee, people with money must just be stupid!". People don't seem to like accepting quite how rationally intelligent markets are - the only thing markets have been shown not to do well is make sacrifices for moral reasons.
Even reading this claim in the narrow context of the article it seems too broad. John Cassidy has written an insightful book “How markets fail“ that explains when markets do not generate optimal or desirable outcomes.
Because it is wishful thinking?
Where would the rational intelligence of stock markets be right now without the trillions of dollars in shares bought up directly by central banks and sovereign wealth funds or by corporations using essentially free money provided by central banks?
Last time I checked none of the economic theories about optimal markets included massive state interventions to help markets find the optimal price.
There is short-term thinking encoded into religion on this planet. Short term thinking in the end even extinguishes your beloved capitalism. If there is one thing we need less, its this. And if there is one thing, build to overcome short term thinking its abstract entity's like cooperation's and goverments. The individual is bound to fail here.
So yes, you have a valid point here, but instead of providing a solution, you just regress and suggest we go back to the drawing board and wing it while there?
If i make good (short-term) decisions each quarter, then won't that just add up to be a good decision after 4 quarters? If it turns out that the 'good' decision last quarter turned out to be bad _this_ quarter, then you'd make a change to fix it for _this_ quarter_.
Rather than plan out a 10 year plan, which you can't possibly predict in advance what may happen.
E.g. one (of many) factor in Commodores decline and failure was that they at one point made a "brilliant" move of undercutting the competition in a way that drove massive sales while costing them dis-proportionally little in lost revenues from all of the hardware already in their channel.
Unfortunately it did that by cutting the feet under their dealer network by going mass market retailers and cutting the RRP in public, without giving retailers advance warning, and without giving their dealers rebates on product in their channel that had not yet been sold.
As a result their results looked good for a little while, but they bred so much resentment in their dealer network that it still haunted them years later when they suddenly badly needed that dealer network to push out the Amiga, which was released at a price point where the mass market discount retailers weren't suitable.
It took years for the total cost of that stunt to be visible, and even then it's hard to account for the total impact to the company even now, decades later.
It's not an easy problem.
the psychology behind dividends is not on your side here. dividends are viewed by knowledgeable investors as a company admitting they have run out of good ideas to generate even more profit (aka growth). while dividends can be issued for a host of reasons, the common case is that dividends are issued when reinvestment in the company would generate diminishing returns. typically returns diminish when the company is no longer in a high growth phase, so the company gives the money back to investors to find better returns elsewhere for their risk.
this is why dividends are largely issued by larger, mature companies rather than growing ones. you just won't get most companies to issue dividends because it hurts their growth potential.
you have to change structural incentives to make people care about the long-term. one fundamental reason for this is that many people on wall street want to get rich quick, so there's enormous pressure for companies to be that vehicle, in exchange for which, the companies get rich quick too via their stock price (underlying fundamentals be damned).
why do people care so much to get rich quick? (rhetorical question) i personally don't respect such people, but apparently plenty enough do that my opinion simply doesn't matter as they seem to get the prestige and power they seek. if we all genuinely respected ingenuity, determination, and the ability to make things (not shuffle money around), we wouldn't use income & wealth as a proxy for those things and we wouldn't have perverse incentives that make companies seek short-term pops (high-minded, i know).
I do like dividend paying stock, but is that not a form of short term thinking? “May me my dividend this quarter, I don’t care when happens next year!”
Because they think it is going even higher?
"Fundamentals" are far from the only reason to be long an equity contract.
In common law countries, trusts law means you can distinguish between who has controlling interest and who has beneficial ownership.
So you can own a thing but not own the thing.
If I own something on trust for you, I can control it, but only in your best interests. If you own it on trust for me, I can benefit from the ownership, but without a lot of other legal effects that would normally ride shotgun with a full and undivided ownership.
As usual: I am not a lawyer, this is not legal advice.
Buying a dividend share that can potentially go up however, is very nice though, such as when purchasing Apple several years ago.
The LTSE serves its purpose of incentivizing long-term ownership of XYZ, but it's a pyrrhic victory: whenever an XYZ shareholder wants liquidity, rather than sell, they could borrow shares of ABC with their XYZ shares held as collateral (by definition, they have the same fundamentals) and short-sell the ABC. Or if they truly want out, they sell their XYZ shares to ABC (no other buyer would be interested, if they can get the same ownership claim with fewer restrictions by buying ABC directly), which then issues new shares on the normal public markets to maintain the peg. Either way, owners of XYZ are still incentivized to care about the short-term price movements of XYZ (through its ABC proxy) on the public markets, because they can achieve liquidity by proxy.
If I own shares in a holding company, which owns shares in an LTSE-company, don’t I have this right? If not me, who else?
It appears to me that it will, at least, make more expensive to think short term than long term, and that is the intended incentive of this stock exchange (as you could as well just buy more shares if you want more control).
Why not just block organizations that sell such a service as above be denied the benefit from increasing voting shares? Why ban all organizations instead of the ones trying to game it?
Large institutional blocks will probably be structured this way because the cost of doing so is low so "why wouldn't you?". In fact there are companies out there where this is already the case as they have similar rules in their constitutional documents and the large blocks do indeed work that way.
There are actually many examples of companies where some shareholders are disenfranchised in one way or another (e.g. family ownership with special rights, minority listings, this type of scheme, 51% "Russian Dolls" holding companies, etc etc). Generally where I've seen these type of rules they serve to strengthen management against shareholders and entrenches the agency conflict to the detriment of the company's value over the long term.
Realistically, in a more typical listed company with a diverse shareholder base the only realistic option shareholders have is to force management out. The irony is that this rule acts to stop this from happening or slow it down and insulate management from that threat (further entrenching the agency conflict between shareholders and management).
Investors who are in the business of more actively engaging with management and strategy tend to do so away from public markets because it's not really that great a strategy unless you can gain significant control in terms of %age stake - so Private Equity, VC, family ownership, etc mostly tend not to be things that happen in publicly listed companies.
Would it be possible to contractually obligate any entities holding these stocks to also adopt tenured shareholder voting power?
Doing so would certainly improve the loophole situation, though I suspect it doesn't fix it entirely... Things probably get weird when you nest tenure effects.
Would it be legal to simply grant extra rights to owners who adhere to the LTSE's rules? Ie, one share carries 1 'point' of voting power, unless the owner is an individual or an entity which adheres to the LTSE rules, in which case the share carries 1 + kt points of voting power.
If an entity outside the LTSE holds some shares, that's fine. They just extract very little value from them compared to an entity within the LTSE, increasing the value of all other shares outstanding and creating a strong incentive for that entity to sell back into LTSE.
Well, depending on the country the LTSE is based in, and whether that law is honored through some trade agreement signed into law in that country, I imagine what the Italian government thinks about the issue is moot.
> what of situations in which collateral shares are foreclosed upon, they are inherited, or other non-voluntary transfers of ownership?
I'm wondering if they have or are considering a grace period where if the shares are reacquired within that period the voting rights remain the same. I imagine they definitely wouldn't want the rights transferred in the case of foreclosure.
Inheritance is an interesting one, but then again, it's only a problem if you take the view that your assets should all be transferred to your relatives on death. As with inheritance taxes, there are competing incentives. Maybe shares under a certain quantity could transfer over with voting weight intact, or maybe they should just lose half their time-based voting weight (or just have the time halved, which might still leave them in the top tier of voting weight).
There's lots of ways to structure it to achieve certain goals. I'm sure some would see new case law made.
I am an Italian citizen. Say I own shares on the LTSE. Say I also owe the Italian government some back taxes, and that the government moves to expropriate my assets to cover my liability. My LTSE shares are now the property of the Italian government and have been shorn of whatever by-laws they might have had attached. The government then proceeds to auction off the components of my esistiate to the highest bidder, who purchases the shares without any obligation regarding his duties and structure.
This is why in general (in the mathematical sense, meaning ”in all cases”) the scheme you posit is not iron-clad. Probably it will work in most circumstances but that’s a lesser level of certainty that offers no guarantees whatsoever.
A holding company like that would confer at most the same voting power as trading XYZ directly, but most likely strictly less voting power in XYZ.
A mutual fund which has only held XYZ for a short time would confer little voting power even to shareholders which have held it the longest.
I wonder if we're going to see the rise of holding companies just to get around this rule. "Our holding company owns shares in XYZ, and will never sell those shares ever. Instead of buying/selling XYZ directly, you can instead buy/sell shares in our holding company. We will confer voting power in XYZ, proportional to how many shares of our holding company you own, regardless of how long you've held them."
I suppose one way to prevent this loophole is to grant voting power only to individuals, and not entities, but that would screw over index-funds, mutual-funds, foundations, non-profit-endowments etc etc.