Act now for long term investment

Investors are being chastised for their role in the economic crisis through speculative trading and applying pressure to boards and management to focus on short-term earnings.

The Aspen Institute Business and Society Program released a statement in September that calls on the US Congress to adopt a number of policies designed to encourage longer-term investing.

The organisation has recruited an impressive list of signatories, including legendary investor Warren Buffett, Vanguard Group founder John Bogle, Duke Energy chief executive Jim Rogers and former Goldman Sachs chairman John Whitehead.

There are two main problems, according to William Sihler, a business professor at the University of Virginia. One is the problem of vote lending, when an investor borrows shares to vote but has no underlying economic interest in the company. This is an issue Securities and Exchange Commission chairwoman Mary Schapiro is expected to look at as part of an overall review of the US proxy voting system. Mr Sihler’s second concern is short-term hedging.

One solution to these problems is to give long-term institutional investors greater voting power, he says. It can also be worth a company’s time and effort to recruit the right kind of shareholders. To encourage long-term stockholders you have to “cultivate institutions that are known to be sympathetic with the idea you can show them what is happening”, he says. Analysts cannot be ignored either. This means sending chief executives and chief financial officers on the road to trade shows and spreading the message of the company’s long-term vision.

Another possible solution is to give shareholders more rights in exchange for time-weighted voting, says Lynn Stout, a law professor at the University of California, Los Angeles and a signatory to the Aspen Institute statement. This is a concept that is embedded in a controversial so-called proxy access proposal at the SEC, which the commission is expected to rule on early next year. According to the draft proposal, if shareholders want to nominate corporate directors on the company ballot they have to hold stock for at least one year. While many businesses would like to see an even longer time period, the concept of encouraging longer holding periods is a good one, Ms Stout says.

While some observers say short-termism has been a problem for the past decade or longer, it has become more prevalent in recent years due to lower trading costs, the advent of technology and the increased use of derivative products.

The Aspen Institute first made waves in this area when it released a set of principles in 2007 that called for an end to quarterly earnings guidance from companies and aligning compensation incentives with an eye toward the long term.

The latest advocacy is “taking it a step further,” says Ms Stout. “It’s not enough to simply discourage quarterly earnings guidance,” she says.

“This round of work is really saying, ‘OK, we need to look at whatever leverage points exist in policy to shore up this direction’,” says Judy Samuelson, executive director of the Aspen Institute Business and Society Program. “Our focus at this point is Capitol Hill and the administration.” The institute is using the networks of its signatories to spread the word in Washington. Hearings on this issue are anticipated in both the House and Senate, several people involved say.

The group wants to revise the capital gains tax provisions or implement an excise tax to reward long-term stock holdings; remove limitations on capital loss deductibility for very long-term holdings; and adopt minimum holding periods or time-based vesting in exchange for more shareholder rights. They are also advocating increased disclosure from investors and applying more enforcement of the fiduciary duties of investor advisers.

Other organisations are supporting this cause. A recent report from a task force of the America Bar Association, which was sent to members of Congress and the SEC, recommended that policymakers encourage shareholder interest in the long term through tax incentives and enhanced voting rights.

At the heart of the issue is a sense that investors encouraged risk-taking and short-sightedness by companies because many shareholders these days are
speculators.

However, Jon Ogg, editor of the financial blog 24/7 Wall Street, says the notion that investors are partly to blame for the financial crisis is “silly”. “If you are an investor that knows the economy is rolling over or that a new development may hit your investments by 40 per cent, are you going to wait blindly for that to smooth out in a few years or are you going to sell and buy back in later?” he asks.

Nonetheless the Aspen Institute has a number of backers. The organisation has had previous success in its campaign to discourage short-termism. Many companies have eliminated quarterly earnings guidance since the organisation’s initial call to do so two years ago.

Kristin Gribben is associate editor of Agenda, a Financial Times service