Did ministers ask what companies think before declaring that good investors are long-term shareholders? Ideas have been floated to give long-term shareholders more votes or to allow investors to buy more voting power, but perhaps it is the short-term shareholders who buy and sell that should be rewarded? Corporations need them.
Shareholders who buy and hold for years might seem ideal investors. Directors get to know them and learn what sort of meetings and information they want. Fund managers better understand the business, ask more intelligent questions and are less likely to make hasty decisions after misinterpreting announcements.
That an investor holds for a long time is a sign of confidence the directors are doing something right and boards may find it comforting to think investment funds are unlikely to sell their shares suddenly.
But if all shareholders were passive, a company would have a share register so static it is fossilised. How can eager new investors buy stock if existing shareholders do not sell? More important, how would the shares be priced without constant buying and selling? It needs a two-way market to provide pricing but it requires frequent dealing to ensure prices are sound; without a liquid market, share prices would jump erratically with no-one able to say which deals represented market values.
Perhaps ministers and companies think the perfect register comprises, say, 90 per cent of shares that do not change hands for years on end and 10 per cent that are constantly churned to provide pricing information. In that case, it should be the people that trade who are rewarded with extra votes, not least to compensate them for their dealing costs. And it is not only directors who benefit from knowing the value of their shares; those passive fund mangers need reliable data for valuing their unit trust or pension portfolios.
Quite why the people holding units or pension policies should want stakes in static portfolios, ministers have not explained. Yes, constant dealing incurs costs, but fund managers are paid to pick winners, not to sit back and watch the market.
Dealing and short-termism are not necessarily synonymous –- a seller could, in theory, have owned the stock for several years and be passing it to a buyer who intends to hold long-term -– but in practice, some investors hold and some deal. But long-term investors are not necessarily good investors: they may be index funds or simply lazy. And in suggesting they have extra votes, Treasury minister Lord Myners is expecting long-term holders to be more active.
Their greater knowledge and understanding of the company is more likely to be used to force change in the business and possibly in the boardroom. Rather than hand out extra votes, directors might decide they prefer investors who sell when they disagree with corporate policy compared with those who stay and cause trouble.
(Pic: A.Poulos (Iya) cc2.0)
