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Patience is a virtue lost on many investors, especially equity investors. Critics argue that their obsessive desire for short-term gains pressures management to favour quarterly profit over sensible long-term investments. When short-termism takes the form of following the crowd, share prices can swing to ludicrous lows and highs. Among other risks, lows can create negative loops of feedback in the share price. Companies may use expensive shares to pay for value-destructive acquisitions.
Michel Barnier, the EU's internal market and services commissioner, wants to do something. One idea is to make shareholders' voting rights dependent on how long the shares had been held. This would bring at least as many problems as it solves. Dual-class share registers are common and even liked in some parts of the world. But it is one thing to accept that companies – with the approval of owners – may give different rights to different classes of shareholder. It is quite another to suggest they should be obliged to do so.
Besides, dual-class shareholder structures contravene the important principle that the voting and economic value of shares should be equal. They entrench complacent managements and may reduce the leverage of shareholder minorities. They might impede effective price discovery and capital allocation in the economic ecosystem.
But a second course of action – reworking dividend entitlements – is worthy of serious consideration. The idea is that shareholders should only receive dividends if they have held shares through the full period – quarter, half-year or year – for which the payment is made. Shares that had traded hands during the period would receive nothing.
The logic is firm: Only shareholders who provide capital for the period it is employed should benefit from the income returns generated. Such a reworking of dividend entitlements would improve the alignment of stakeholder interests without introducing anomalies. It might allow higher dividends for loyal investors, if the same pot were divided among fewer holders. Alternatively, companies could invest cash that would have otherwise gone to short-term investors.
Harsher critics of short-termism might want to see more drastic changes. But loyalty dividends could be just enough to remind investors, and companies, about the responsibilities and legitimate rewards of ownership.