The Global Financial Crisis: Risk, Shareholder Pressure, and Short-Termism in Financial Institutions - Does Enlightened Shareholder Value Offer a Panacea?

Abstract

There have been several reasons given for the advent of the Global Financial Crisis (GFC) in 2007. It is likely that most, if not all, of those that have been identified contributed in some way to what occurred in financial markets. This paper identifies a number of them and takes one of the reasons, namely the fact that over-leverage and excessive risks were embraced by many financial institutions, and inquires why these institutions engaged in such practice. The paper suggests that one of the primary catalysts for this action was a focus on short-termism, and the issue and the problems which it poses are discussed. Several factors that led to a short-termist approach are mentioned in the paper, but the study focuses on two particular elements, namely, an emphasis on quarterly earnings and pressure from shareholders, and it discusses these factors. It then considers the fact that the UK government has endeavoured to encourage less of a focus on short-termism and a greater focus on long-term approach. The paper discusses the fact that the Government has sought to do this via its relatively new companies legislation, and particular through the employment of the principle which is known as ‘enlightened shareholder value.’ The paper traces the emergence of this principle from its consideration in policy reviews to the Government’s embrace of it in White Papers. In light of the fact that the GFC was caused by, inter alia, short-termism, the paper then examines whether developments in UK company law and the Government’s implementation of the principle of enlightened shareholder value in the Companies Act 2006 through sections 172 and 417, is likely to provide a sufficient measure that will go some way to ensuring that boards will not engage in excessive risk-taking in the future and will refrain from embracing short-termism.