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Dual Pathway for Short-Termism Reform

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Stock Market Short-Termism

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Abstract

This chapter analyzes if the reforms identified in Chapter 4 solve the SMST issue. Based on the analysis in the previous chapters, this chapter presents a dual pathway for reform. This dual pathway provides that an effective remedy to the short-termism problem involves either: (1) minimizing the excessive discounting of future returns; or (2) cutting off the transmission mechanisms of short-termism. Option (2) requires ‘hard’ law reform, and Option (1) is a ‘lighter’ touch. Few of the reforms set out in Chapter 4 address the short-termism issue, and the ones that do proceed via Option (1). Given the inherent difficulty in effectively regulating to correct short-termism, it is not surprising that the few implemented reforms to date have been minimal and relatively ‘light’ touch. This chapter concludes that reform efforts should continue to be ‘light’ touch but should focus on reforms following Option (1) of the dual pathway.

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Notes

  1. 1.

    See Chapter 5, Sect. B.2.b.

  2. 2.

    See the summary of research in Dobbs (2009, 118).

  3. 3.

    See Chapter 5, Sect. A.

  4. 4.

    See discussion of dual class structures in Chapter 4, Sect. A.1.c.

  5. 5.

    See Ambachtsheer (2014, 9), where the author suggests that “institutional investors around the globe, led by the pension fund sector, are well placed to play a ‘lead wagon’ fiduciary role” in efforts to end SMST and Barton and Wiseman (2014, 44), where the authors argue that big investors have an obligation to “end the plague of short-termism.”

  6. 6.

    As discussed in the seminal work of Jensen and Meckling, William (1976) on agency theory, where at 308 the authors state that “monitoring includes more than just observing the behaviour of the agent…[i]t includes efforts on the part of the principal to ‘control’ the behaviour of the agent through budget restrictions, compensation policies, operating rules, etc.”

  7. 7.

    Cheffins (2002, 360).

  8. 8.

    Dasgupta and Piacentino (2015, 2853).

  9. 9.

    For example, see the—UK Companies Act, 2006, Chapter 46 (UK Companies Act), Section 1159, which defines control in the context of subsidiaries, and the discussion of the Delaware court position in Wolf (2014).

  10. 10.

    Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code) (Delaware General Corporation Law).

  11. 11.

    Delaware General Corporation Law, §203(c)(4).

  12. 12.

    AGM Trends (2017, 15).

  13. 13.

    For example, see Demsetz and Lehn (1985), Bolton and Thadden (1998), Cho (1998), and Demsetz and Villalonga (2001).

  14. 14.

    See Chapter 5, Sect. C.1.a.

  15. 15.

    See the discussion in Nguyen and Nielsen (2013).

  16. 16.

    Ibid, 5.

  17. 17.

    Grossman and Hart (1980), Shleifer and Vishny (1986), and Cheffins (2002, 366).

  18. 18.

    Dent (2010, 116–117).

  19. 19.

    Lin (2017, 458) and see the discussion in Cheffins (2002, 366).

  20. 20.

    Ibid.

  21. 21.

    Demsetz (1983).

  22. 22.

    Glosten and Milgrom (1985) and Maug (1998).

  23. 23.

    Cheffins (2002, 357).

  24. 24.

    Ibid., referencing “In the Family’s Way” The Economist (London) 15 December 2001, 75.

  25. 25.

    Ibid.

  26. 26.

    See Chapter 6, Sect. B.1.

  27. 27.

    Lipton and Rosenblum (1991, 225).

  28. 28.

    Ibid., 228.

  29. 29.

    Stout (2012), Bainbridge (2006), and Bratton and Wachter (2010).

  30. 30.

    Fox and Lorsch (2012) and Porter (1992).

  31. 31.

    For example, see Drucker (1986) at A32 arguing outside pressures push top managements toward short-term decisions.

  32. 32.

    For example, see Nocera (2011) and Sorkin (2013).

  33. 33.

    Aspen Institute (2009, 2010).

  34. 34.

    Kay (2012) (Kay Review).

  35. 35.

    Implementation (2014).

  36. 36.

    Bebchuk (2013, 1639).

  37. 37.

    Ibid.

  38. 38.

    Ibid., 1640.

  39. 39.

    Ibid., 1643.

  40. 40.

    Ibid.

  41. 41.

    Chapter 6, Sect. B.1.

  42. 42.

    Martin (2011) and Kay (2012, 13) (Recommendation 15).

  43. 43.

    Lipton and Rosenblum (1991).

  44. 44.

    Bebchuk (2013, 239).

  45. 45.

    See the discussion in Chapter 6, Sect. C.1.

  46. 46.

    LOI n° 2014-384 du 29 mars 2014 visant à reconquérir l’économie réelle (1) NOR: EFIX1322399L enacted in April 2014 (Florange Law).

  47. 47.

    See Chapter 4, Sect. A.1.a.

  48. 48.

    Ibid.

  49. 49.

    See Chapter 4, Sect. A.1.c.

  50. 50.

    Ibid., Sect. A.1.

  51. 51.

    Ibid.

  52. 52.

    See Chapter 4, Sect. A.3.

  53. 53.

    UK Financial Services and Markets Act (Transparency) Regulations 2014 giving authority to the UK Financial Conduct Authority (FCA) to remove the requirement from the Disclosure and Transparency Rules in the FCA Handbook. https://www.handbook.fca.org.uk/.

  54. 54.

    Directive 2013/50/EU (EU Transparency Directive).

  55. 55.

    See Chapter 4, Sect. A.3.a.

  56. 56.

    See Chapter 4, Sect. A.3.b.

  57. 57.

    The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

  58. 58.

    Financial Reporting Council, Guidance on the Strategic Report (June 2014).

  59. 59.

    EU Recommendation 2014/208/EU.

  60. 60.

    Directive 2014/95/EU, which was in place in EU Member States by December 2016.

  61. 61.

    See Chapter 4, Sect. A.3.b.

  62. 62.

    The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

  63. 63.

    See Chapter 4, Sect. A.4.

  64. 64.

    Directive (EU) 2017/828 of the European Parliament and of the Council, of 17 May 2017, amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (effective as of 9 June 2017) (EU Amended Shareholder Rights Directive).

  65. 65.

    EU Amended Shareholder Rights Directive, Article 3a and 3b.

  66. 66.

    The UK Investor Forum. https://www.investorforum.org.uk/ (UK Investors Forum).

  67. 67.

    https://www.investorforum.org.uk/about/purpose/.

  68. 68.

    See Chapter 4, Sect. A.5.

  69. 69.

    ESMA Guidelines for competent authorities and UCITS management companies on ETFs and other UCITS issues, ESMA/2012/832EN (UCITS Directive).

  70. 70.

    See Chapter 4, Sect. A.6.

  71. 71.

    See Chapter 4, Sect. B.1.

  72. 72.

    https://www.frc.org.uk/investors/uk-stewardship-code (UK Stewardship Code).

  73. 73.

    Implementation (2014, 11).

  74. 74.

    Japanese Financial Services Authority, “Stewardship Code; 227 institutional investors have signed up to the Principles for Responsible Institutional Investors as of April 5, 2018”. Online: https://www.fsa.go.jp/en/refer/councils/stewardship/20160315.html.

  75. 75.

    Stewardship Disclosure Framework. Online: http://www.plsa.co.uk/PolicyandResearch/Corporate-Governance/Stewardship/Stewardship-disclosure-framework.aspx (NAPF Stewardship Disclosure Framework).

  76. 76.

    http://www.fclt.org.

  77. 77.

    Turner (2016).

  78. 78.

    Oyedele (2017).

  79. 79.

    Fink (2018).

  80. 80.

    See Chapter 4, Sect. B.1.

  81. 81.

    Ibid., Sect. B.3.

  82. 82.

    Implementation (2014, 37–39).

  83. 83.

    See Chapter 6, Sect. C.1.

  84. 84.

    See Chapter 4, Sect. B.3.

  85. 85.

    See Chapter 4, Sect. B.4.

  86. 86.

    UK Stewardship Code, 9, principle 6.

  87. 87.

    EU Amended Shareholder Rights Directive, Article 3c.

  88. 88.

    Thomas Minder initiative in English, ‘Maurice’s Musings’ (1 March 2013) (Minder Initiative).

  89. 89.

    Johnston and Morrow (2014, 1).

  90. 90.

    See Chapter 4, Sect. B.7.

  91. 91.

    EU Amended Shareholder Rights Directive, Article 3j.

  92. 92.

    See Chapter 4, Sect. C.1.

  93. 93.

    UK Enterprise and Regulatory Reform Act 2013 and The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (UK Remuneration Regulations).

  94. 94.

    Lipton and Rosenblum (1991).

  95. 95.

    Implemented in August 2015 by an amendment to US securities regulation on executive compensation required as part of the Dodd-Frank reforms—SEC, ‘Pay Versus Performance’, Proposed Rule proposing amendments to Item 402 of Regulation S-K to implement Section 14(i) of the Securities Exchange Act of 1934.

  96. 96.

    Lipton and Rosenblum (1991).

  97. 97.

    See discussion in Chapter 4, Sect. C.1.

  98. 98.

    See Chapter 4, Sect. C.2.

  99. 99.

    UK Companies Act 2006, Chapter 46, (UK Companies Act).

  100. 100.

    Jolls and Sunstein (2006, 200).

  101. 101.

    Bollen (2012, 137).

  102. 102.

    Simon (1955, 99).

  103. 103.

    Kahneman (2003, 697).

  104. 104.

    Jolls and Sunstein (2006, 200).

  105. 105.

    Ibid., 200–201.

  106. 106.

    Sunstein (2014).

  107. 107.

    Sunstein (2014, 17).

  108. 108.

    Ibid.

  109. 109.

    Sunstein (1996, 2024).

  110. 110.

    Ibid., see the summary of the discussion on the expressive function of law at footnote 14 of Sunstein (1996).

  111. 111.

    Ibid., 2050.

  112. 112.

    Jurrikkala (2012, 36–38).

  113. 113.

    Public choice theory is a widely accepted theory in economics that challenges the assumption of rational and well intentioned law-making. See the summary in Jurrikkala (2012, 37) and generally in Lucas and Tasic (2015), in which the authors consider behavioural public choice theory, which expands traditional public choice theory to encompass research in behavioural economics.

  114. 114.

    Jurrikkala (2012, 36–38).

  115. 115.

    Ibid., 51.

  116. 116.

    Ibid., referring to Camerer et al. (2003).

  117. 117.

    Jurrikkala (2012, 36).

  118. 118.

    Ibid., 60.

  119. 119.

    European Union Green Paper. 2011. “The EU Corporate Governance Framework.” COM (2011)164. 5 April 2011 (EU Governance Green Paper).

  120. 120.

    Teubner (1983).

  121. 121.

    Ibid., 240.

  122. 122.

    Ibid., 242 and 245.

  123. 123.

    Ibid., 242.

  124. 124.

    This approach is adapted from the analysis of reflexive law in the context of environmental regulation—see Hirsch (2010).

  125. 125.

    Jurrikkala (2012, 36–38, 66–74 and 86–90).

  126. 126.

    Ibid., 82 referring to Bardach and Kagan (1982), describing compliance culture, and Ayres and Braithwaite (1992), providing examples of compliance culture and possible strategies to reduce it.

  127. 127.

    Shiller (2015, 237).

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Willey, K.M. (2019). Dual Pathway for Short-Termism Reform. In: Stock Market Short-Termism. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22903-0_8

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