David Kunsch and Pouya Seifzadeh
BridgeTower Media Newswires
The increasing pressure from shareholders is resulting in company executives making strategic decisions more frequently. Shareholders, enabled by technology, have a better view into the company’s ongoing affairs, are more capable of voicing their concerns, and are able to more quickly invest in or divest from publicly listed companies. It is not a revival of the role of shareholders; they were never this powerful. However, is this shift in dynamics undermining the traditional role of ownership, and should we rethink mechanisms of influence that connect shareholders to companies they have invested in?
Dave: As CEOs’ primary responsibility is to shareholders, they should put their will above everything else. Shareholders are demanding either higher returns on their investment, or higher value for it. The biggest threat is when managers feel that they can pursue other interests other than what shareholders really want. If shareholders’ preference is higher returns or higher share prices, so be it.
Pouya: I hear you, but from what I see, shareholders are increasingly acting tyrannical with respect to their investments. They want returns, and they want them now. Strategic decisions don’t necessarily have immediate positive outcomes. CEOs should understand that while investors come and go, there is much more at stake and therefore, they need to put the best interest of the company front and center, not just investors that are there for the short term.
Dave: Look this is pretty simple ... shareholders are the ones who have contributed capital to the formation and maintenance of the corporation and so have exclusive rights to the profits and any return of capital of the corporation. It is simply a transaction in that sense. There is no reason that we need any other test of loyalty for the shareholders as they can be as disloyal, short term or stupid as they want — it is their capital. If management does not like how short term or stupid their shareholders are — then quit and find another job.
Shareholders have many reasons for buying and selling shares that may have nothing to do with the future direction or long term prospects of the company: need for cash, rotation out of one sector into another sector rotation out of one jurisdiction into another. I suggest it is a fool’s game to try and impose specific reasons to buy and sell shares as there can be different reasons for each shareholder.
Pouya: I can understand and appreciate that point of view, but the state of the economy and the overall economic health of any nation is hardly separate from the health of its institutions. We have many other sets of regulations in place to make sure self-interest and guile of individuals do not undermine the best interest of the economy in which they are nested. If there have not been sufficient checks and balances in place it is not because there shouldn’t be but rather because the state of technology was never at a level that required imposition of such regulations. Think about driving and traffic laws for a moment: they only came into existence when automobiles became abundant and technology allowed them to exceed certain speeds. Now we are standing at a time in history when shareholders can own equity at a click of a button. Then they can do the reverse rather immediately. Many of these shareholders are not even aware of the nature of the business that companies they have invested in are involved with. The technology has transformed the majority of shareholders from the backbone of the economy to what can be severely to the detriment of strategic investments. Ownership is still quite regulated. We have preferred management shares and other types. At the very least, we should start to impose certain regulations on the process of transactions, or at least require certain commitments from investors.
Dave: “Cum omnes conatus est aliud, moderari,” which my translator says means “when all else has been tried, regulate.” I would submit we have not tried all else yet. First, I do not agree that there is a problem, but for the sake of argument let’s say there is. If the source of the problem is indeed a technological one instead of a human one, then we may have to look at a technical solution. For example, about 70 percent of U.S. stock trading is done automatically by algorithms, and in 64 millionths of a second. I do not think you need to regulate this; the technology will have changed by the time any human-made regulation takes effect rendering it moot. Also, there are arguments that even though these algorithms may be based on very short-term event horizons, they are very good for liquidity. And if “flash crashes” are your worry, then there are technical limit switches that can be employed. So my argument is you really cannot effectively regulate technology without harming the operation of the market and the U.S. markets’ competitiveness with markets around the world. If the source of the problem is human behavior to be short-sighted (or some homo-techno combination) then there probably are some non-regulatory ways to convince humans the benefits of long-term investing — education for one. If all attempts at human behavior modification don’t work — and I would not be optimistic that they would — then some sort of regulation can be contemplated but not before this failure.
Pouya: I can see your side of the argument, although I’m not as optimistic. I feel that for far too long we have created mechanisms to protect shareholders (principals) against the greed of managers (agents). Protective mechanisms against malicious agency (i.e., agents instrumentalizing shareholder assets to make persona gains), have been based on the implicit assumption that the best interest of shareholders is served when a company is operating at its best. But I believe that stakeholders such as employees, economic context, and the surrounding community should also be accounted for. I feel that the advent of technology has resulted in a switch of roles and now we are facing a tyranny of short-term investors who are willing to run a company to the ground, only for their immediate gains. This is quite paradoxical; it is agency in reverse. I hope your optimism has more reality to it than my skepticism.
Dave: To be honest I hate to agree with you but data and technology has made it easier to assess what the short versus long term prospects of a company may be. I am all for individual actions but your question raises issues about the overall common good. I detest regulation but having been a senior manager at a publicly traded company, I know the perils of listening to the market versus doing what is “in the best interest of the firm.” I would put this down to the board in that they are supposed to look after the sustainability of the company itself and so should think of/resist/accommodate short-term interest versus long-term interest. ... I put this on the directors to solve/alleviate this issue. Ultimately the board of directors has to step up and do their job. ... I am cautiously optimistic.
Pouya: It is quite a complex paradox and let’s just hope your optimism will prevail.
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David Kunsch is an associate professor of strategy at St. John Fisher College. Pouya Seifzadeh is an assistant professor of strategy at SUNY Geneseo.
