December 23, 2013
Improved Corporate Communication Key to Long Term Investment
by Robert Kropp
Based on consultations with investors and companies, a new paper finds little support for the
concept of loyalty-driven securities, but investors agree on the importance of long-term investment
Early in 2012, the London office of Generation
Investment Management published Sustainable Capitalism, a document which builds upon a
2011 manifesto authored by firm founders Al Gore and David Blood. "Sustainable Capitalism
encourages us to generate financial returns in a long-term and responsible manner," the report
stated, "and calls for internalizing negative externalities through appropriate pricing."
Sustainable Capitalism recommended
five actions that should be adopted immediately:
Identify and incorporate risks from stranded
mandate integrated reporting;
end the default practice of issuing quarterly
align compensation structures with long-term sustainable performance; and
encourage long-term investing with loyalty-driven securities.
As a result of interest
in Sustainable Capitalism, the Generation Foundation teamed with Mercer and the Canadian law firm
Stikeman Elliott to convene the Loyalty Rewards Project, “a year-long collaborative
global research consultation with key investment stakeholders regarding ways corporations can build
long-term shareholder loyalty.” A specific goal of the project was to learn the opinions of
stakeholders regarding the concept of loyalty-driven securities.
The consultation resulted
in a report published this month, entitled Building a Long-Term Shareholder Base: Assessing the
Potential of Loyalty-Driven Securities.
“The concept of loyalty-driven securities is
a share structure that provides differentiated rights or rewards to a group of shareholders
identified on the basis of the tenure of their shareholding,” the report states. According to the
concept, long-term investors would be rewarded for their “patient capital” through such means as
expanded proxy voting rights, for example. The practice could potentially “better align companies
and investors with a shared focus on long-term value creation.”
The report found little
support among investors for the idea of loyalty-driven securities. Many argued that differentiated
share classes ran counter to generally accepted concepts of good corporate governance based on one
proxy vote for one share of stock. Some participants pointed to administrative complexities or the
weakness of the incentives as arguments against adopting a new share class. And many investors “did
not equate the problem (of short-termism) to declining holding periods” at all.
Nevertheless, “the investment community as a whole does see short-term behaviors as detrimental
to good corporate governance and therefore investment performance,” report co-author Jane
Ambachtsheer of Mercer said. Respondents generally agreed that three areas presented as priorities:
Longer time horizons for investment analysis:
aligned frameworks for performance
measurement and reward; and
stronger relationships between companies and investors.
more constructive relationship between companies and their long-horizon investors is required to
deliver longer-term value creation,” the report concluded. “If investors are going to support
long-term decisions, which may take some time to pay off, they need to have faith in the strategy
and also the executive team that will execute it.”
“There is a growing consensus across
the business and investment community that taking a longer term view inevitably creates more
value,” David Blood said. “The challenge now is how best to harness this broad support for long
termism, push forward with real and decisive actions, and ultimately create a more sustainable form
“The incentives for myopic leadership remain acute,” said report
co-author Ed Waitzer of Stikeman Elliott. “The themes that emerge from the research reflect a
collective desire to get beyond aspirational talk to truly collaborating about how to address the
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