Little support for shareholder loyalty rewards

Although investors, corporations and fund managers 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, such as loyalty dividends, warrants or additional voting rights.

That’s according to a report by Mercer, Stikeman Elliott and the Generation Foundation, the advocacy group of Generation Investment Management. More than 100 investment managers, asset owners, corporate directors, and industry and academic experts participated in the consultation.

Respondents identified four main obstacles in using loyalty rewards as a means to overcome the root cause of the short-term pressures found in the full investment chain:

  • discrimination between shareholders due to belief in “one share, one vote”;
  • risk of unintended consequences;
  • administrative complexities; and
  • uncertainty that loyalty-driven securities would incent a significant change in behaviour and address the root causes of short-termism.

To solve the short-termism dilemma, discussions on alternative solutions centred on several themes:

  • a longer-term perspective and focus on economic value creation is possible only if supported by appropriately aligned performance measurement and reward frameworks;
  • a more constructive relationship between companies and their long-horizon investors is required; and
  • 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).

“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, signalling that the issue needs to be addressed,” says Jane Ambachtsheer, Mercer’s global head of responsible investment.

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