One of the silver linings in the cloud of the recent financial market crisis has been a much sharper focus on the hazards of short-termism.
Simply put, what you do for the short term is often opposed to what you want (or what is socially desirable) in the long term. Most incentives that motivate our political and business leaders are heavily weighted to the short term.
The U.S. financial sector crisis, and the manner in which it quickly spread around the world, vividly demonstrated how an undue focus on short-term returns can lead to insufficient attention to sustainable, long-term growth.
New mechanisms to encourage shareholder responsibility, including the franchise to help leaders overcome their institutional myopia, are in order.
The Aspen Institute, a leading U.S. private sector think tank, recently convened a group of business leaders to address this concern and find ways to encourage a more responsible approach to business management and corporate ownership. Its recommendations included adopting minimum holding periods or time-based vesting for enhanced shareholder participation rights (such as voting and/or dividend entitlements).
Similarly, the U.S. Securities and Exchange Commission has proposed a one-year holding period for shareholders to be able to nominate directors to corporate boards.
Such proposals suggest a move to redefining the relationship between a company and its long-term shareholders.
In Britain, former Morgan Stanley chairman Sir David Walker was tasked with an independent review of corporate governance in financial services. His final report, released last month, suggested that "significant holders of stock need to be accorded at least implicit social legitimacy" and concluded that a situation in which major shareholders exercise their influence primarily by buying or selling stock is not a satisfactory ownership model.
A Dutch advisory committee on the future of banks came to similar conclusions about the exercise of influence by long-term owners. That panel proposed that stable bank shareholders, preferably four years or longer, should receive extra rewards, such as "loyalty" dividends or increased voting rights.
Britain's Financial Services Secretary, Paul Myners, has recently made similar recommendations - suggesting that shareowners who do not hold shares for the long-term should have inferior voting rights.
The idea of giving extra voting rights to long-term shareholders isn't new. In France, where it is spelled out in corporate law, expanded rights have long been considered a suitable reward for shareholders who demonstrate their commitment to the long-term performance of a company. It is common practice for shares to acquire double voting rights after they have been registered in the name of the same owner for a specified period of time (usually two years but, for example, in the case of Pernod Ricard SA, 10 years).
Let's consider this concept in the Canadian context. As is the case in France - and most markets other than the United States and Britain - many Canadian companies already have a controlling shareholder. In such cases, it is difficult to argue that extra voting rights for long-term, non-controlling shareholders could harm the interests of the minority.
(Other arguments against double voting rights in Europe have tended to focus on transparency and on the mechanics of share transferability and lending arrangements. Without playing down these or other details of implementation, starting with fundamental corporate law issues relating to the implementation of differential voting rights, they should be susceptible to technical solutions.)
The case for extra voting rights for long-term shareholders may be even more compelling for companies with widely dispersed share ownership. Here, the impact could be more than symbolic. The object would be to align incentives for a longer-term view of corporate performance by, in effect, subsidizing the voting power of long-term holders. Such extra voting rights might be limited, to ensure that minority shareholders do not acquire control solely by virtue of their extra voting rights (that is, without paying a control premium to all shareholders).
An obvious attraction of the enhanced voting mechanism would be the ability of companies to implement it without the need for regulatory intervention and to tailor it to their particular circumstances (recognizing that implementation would likely require approval by existing shareholders).
In many respects, traditional governance mechanisms may have become the victims of their own success. They need to be re-examined. The extreme market behaviours we are suffering through demand a rethinking of basic theories and assumptions - and a willingness to look outside the box.
Claude Lévi-Strauss is recalled for saying that the wise person is not she who provides the right response but, rather, she who poses the right questions. An in-depth look at the whole question of extra voting rights, or other benefits, for long-term shareholders in the Canadian context might help focus the attention of market participants and policy makers on at least one such question - how best to encourage patient capital and, generally, to realign market incentives to reinforce society's long-term goals.
Such scrutiny and dialogue may help energize those who despair about our ability to respond to the challenging issues we face.
Ed Waitzer holds the Jarislowsky Dimma Mooney Chair in Corporate Governance at York University, is a partner (and former chair) of Stikeman Elliott LLP and is a former chair of the Ontario Securities Commission.