Convention organized by College of Antwerp, Harvard Regulation Faculty and ECGI on 30 Might
Brief-termist habits by companies is commonly seen as a big societal downside. For instance, Joe Biden wrote in a 2016 op-ed for the Wall Avenue Journal: “Brief-termism […] is likely one of the biggest threats to America’s enduring prosperity”.
Nevertheless, the controversy on short-termism has to date largely targeted on attainable short-termism within the US and the UK). Brief-termism in European company governance has obtained a lot much less consideration. A notable exception is the 2020 EY research for the European Fee on “administrators’ duties and sustainable company governance. This research is mostly considered closely flawed, nonetheless.
Because of this, the College of Antwerp, Harvard Regulation Faculty and the European Company Governance Institute (ECGI) have determined to arrange a conference on “short-termism in European company governance” on 30 Might in Antwerp. We imagine that you will need to research short-termism in (continental) Europe, as a result of company governance in continental Europe differs in vital respects from company governance within the US and the UK, with probably profound implications for the short-termism debate.
Controlling shareholders in Europe
A primary vital distinction is that companies in continental European nations extra usually have a controlling shareholder than companies within the US and the UK. For instance, in keeping with one paper, the proportion of shares held by the biggest shareholder within the company is way increased in France (46.4%), Germany (45.3%), Belgium (38.6%) and the Netherlands (34.6%), than within the US (21.4%) and the UK (19.5%).
That is related, as a result of controlling can have an vital affect on short-termism, as I argue in a recent working paper. If company short-termism is brought on by short-termist institutional buyers pressuring managers for short-term outcomes, controlling shareholders will block the transmission of this short-termism. As well as, if short-termist managers are inflicting company short-termism, controlling shareholders have the incentives and the facility to observe these short-termist managers, and trigger them to be extra long-term oriented.
Whether or not controlling shareholders have a constructive or damaging affect on a company’s long-term orientation will rely upon the circumstances, and significantly on the kind of controlling shareholders. On the one hand, controlling shareholders have stronger incentives to suppose in the long run than different shareholders, because of the measurement and illiquidity of their participation, which exposes them to a bigger extent to the long-term money flows of the company. However, controlling shareholders may additionally take pleasure in personal advantages of management. As a result of some personal advantages of management aren’t simply transferred, controlling shareholders could also be “locked in” and compelled to think about the long-term way forward for the company. Nevertheless, personal advantages of management may additionally incentivize controlling shareholders to behave in a short-termist method. For instance, a household controlling shareholder could prioritize its short-term liquidity wants over the long-term investments wanted by the company.
Govt compensation construction in Europe
A second notable distinction of European company governance is the construction of govt compensation. Share grants and inventory choices make up a smaller portion of govt compensation in continental Europe than within the US and the UK, and the next portion of whole pay is fastened as a substitute of variable in Europe, in keeping with research.
What govt compensation construction is perfect will be debated. Nevertheless, variable pay can incentivize short-termism whether it is based mostly on short-term targets, and even targets in long-term incentive plans turn out to be short-term targets over time. As well as, if executives can promote the shares and inventory choices that they’ve been awarded as a part of their compensation, they’ll profit from short-term bumps to the inventory worth, whereas avoiding the long-term inventory worth reversal. There may be some empirical proof within the US that short-term incentives in govt compensation, particularly within the type of shares and inventory choices that may be offered within the short-term, certainly results in short-term targeted company habits, equivalent to cuts to funding (Edmans, Fang and Lewellen, 2017; Ladika and Sautner, 2020; Edmans, Fang and Huang, 2021).
As a result of govt compensation is mostly structured in another way in Europe than within the US and the UK, you will need to research short-termism as properly from a European perspective.
Shareholder activism and engagement in Europe
Third, continental European company governance can be completely different from the UK and the US as a result of shareholder activism and shareholder engagement play a a lot smaller function. Studies report that the variety of activist engagements per the variety of listed corporations is smaller in European nations like Belgium and France than the US and the UK.
Whereas a number of authors have argued that shareholder activists are excessively targeted on the brief time period and strain the administration of a company to take short-termist actions, others have argued that shareholder activism boosts long-term agency efficiency. Nevertheless, as a result of shareholder activism is way much less widespread in Europe, the argument that short-termism is brought on by shareholder activists carries a lot much less weight in Europe. As well as, shareholder engagement in Europe is commonly much less confrontational than within the US.
These variations justify finding out the affect of shareholder activism on short-termism within the European context as properly.
Loyalty voting rights in Europe
European legislators have additionally adopted governance reforms with the aim of combatting short-termism. The preferred reform has been to permit companies to grant “loyalty voting rights” to shareholders: a number of voting rights for “loyal” shareholders who’ve held their shares for greater than a specified time interval. Such loyalty voting rights are allowed in Belgium, France, the Netherlands, Italy and Spain (amongst different jurisdictions).
The thought behind permitting loyalty voting rights is that it encourages shareholders (and due to this fact not directly companies) to suppose in the long run. Nevertheless, in observe loyalty voting rights appear to be largely utilized by controlling shareholders to strengthen their management (or retain their management when promoting shares or not taking part in new share issuances). Sensible boundaries make loyalty voting rights de facto unavailable for long-term institutional buyers. Whether or not loyalty voting rights are useful or not for combatting short-termism due to this fact relies on whether or not you imagine controlling shareholders usually are extra long-term oriented or not.
This debate on loyalty voting rights in Europe additionally justifies finding out short-termism within the European context.
Conclusion
These matters, and plenty of others, will likely be addressed extra comprehensively by our audio system and discussants throughout the conference on “short-termism in European company governance” on 30 Might in Antwerp. Registration continues to be attainable and is free for lecturers and college students (€100 for practitioners). Individuals can attend on-line or in particular person in Antwerp. This system and extra data will be discovered here.
Tom Vos
Visiting professor on the Jean-Pierre Blumberg Chair
on the College of Antwerp
Affiliate at Linklaters Belgium
Voluntary scientific collaborator on the KU Leuven
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