Good Versus Bad Capitalism: A Call for a Governance Revolution

Abstract

This paper examines a number of inter-related questions, which portend a different kind of corporate governance than the accumulation and refinement of fiduciary responsibilities heaped upon boards over the last twenty years.• Is short-termism in corporate management a truly serious problem? If so, why has it come about?A pernicious combination of factors may well bring about a short-term perspective in corporate management: 1. Financial players threatening actions against management if it does not deliver increased share price; 2. Boards of directors intimidated by activist hedge funds and proxy advisers; 3. Warped incentive systems prodding and “bribing” management to take actions to boost short-term stock price.• Are activist investors and hedge funds really short-term players whose actions have a negative impact on corporations in the longer term?According to Cremers, Pareek, and Sautner [“Stock Duration and Misvaluation”, SSRN No.2190437, December 2012], the average share holding period of institutional investors has barely changed since 1985; it hovers between 1.2 and 1.5 years. Remarkably, some have concluded from these results that institutional investors are not short-term holders! Since when holding shares for 1.5 years turns one into a long-term holder? These results actually show that the trend to shorter holding period has been in place since the 1980’s. By 1985, the average holding period had already dropped to some 1.5 years; the further drop (to under one year) may be the product of speed traders and others; but there is no doubt that shares were held for a much longer period of time before the first wave (since the 1920s) of short-term “investors” appeared in the 1980s.• Do boards really need to be better insulated from the actions of “activist” investors as well as from unwanted takeovers?Canada is very different from the U.S. in matters of corporate ownership and board empowerment. The three “betes noires” of U.S. activist institutional funds and proxy advisers are non-issues in Canada: 1. Splitting the roles of Chair and CEO (Only 41% of SP fully 85% of Canadian companies have divided the roles of Chair and CEO, an important principle in situations of conflicts with shareholders); 2. Eliminating staggered boards and electing all members every year. A third of the SP staggered boards are practically non-existent in Canada; 3. Curtailing the role and duration of poison pills as a defense mechanism against takeovers; these attempts have been largely unsuccessful in the U.S., particularly in States which grant very specific and extensive powers to the board of directors in situations of attempted takeover; none of these defenses are available to Canadian companies as a result of decrees by the securities commissions.The result is that Canadian boards are less empowered than the board of any run-of-the mill American corporation. American activists would hail Canada as the Promised Land for shareholder rights.• Who owns the publicly listed corporations? Society at large may rightfully claim that it has a stake in companies operating in its midst, a stake just as important as that of shareholders (Brennan, 2005). No doubt that a fickle, volatile, ever-changing shareholding base provides arguments for a different concept of “who owns the company”.The basic assumption underlying “corporate democracy”, the one-share-one vote mantra, has become questionable. In a world of “empty voting”, total return swaps, record date capture, speed-trading, transient share flippers, arbitrageurs, speculators and game players, the question arises: are any and all shareholders the legitimate owners of publicly traded corporations?In all decent societies, “Tourists don’t vote!” and “Gamblers don’t own the casino!”Every democracy imposes a minimum period of time before a newcomer acquires the full rights of citizenship, particularly the right to vote. Corporate democracy likewise should call for a modicum of commitment from a shareholder before he or she can influence the destiny of the corporation, for example a one-year holding period.The long-run welfare of societies and the economic vigor of industrial companies are more important than the spurious lure of “shareholder value” and the freedom to practice financial sleights-of-hand.