CONTEXTUALISING SHORT-TERMISM: DOES THE CORPORATE LEGAL LANDSCAPE FACILITATE MANAGERIAL MYOPIA?

Abstract

Despite the media attention lavished on short-termism, the UK perspective has not enjoyed any sustained examination of the sort Professor Mark Roe has undertaken in the US. The short-termist view provides that substantial weight is placed on current profits, leading to companies being managed according to these same short-term horizons, through transmission mechanisms from market to boardroom. This paper analyses whether short-termism in listed companies should affect corporate lawmaking in the UK. It examines market behaviour and the legal landscape, and the extent to which they dissuade or stimulate the corporate search for instant gratification. This paper assesses hostile takeovers, executive remuneration and shareholder activism as potential transmission mechanisms for short-termism. It finds that the first two are particularly effective mechanisms, while the third is circumscribed by the costs of collective action and rational apathy. The conclusion is that short-termism in listed companies should affect regulatory and legislative proposals in the UK. Breaking transmission mechanisms is crucial to prevent short-termism in corporate decision-making. Regulatory proposals are therefore suggested, endorsing Main’s Career Shares and reform of the composition of remuneration committees.