Monday, December 10, 2012

New Tools for Shafting Shareholders

When we buy shares in a company, one of the things we count on is that all shares are treated equally and get an equal slice of the company’s profits. The Financial Post reported on research into changing this equal treatment:
“A global research project launched Wednesday by Mercer, Stikeman Elliott LLP and the Generation Foundation will look at the concept of granting ‘loyalty’ dividends or warrants, or additional voting rights, that would ‘reward’ certain corporate shareholders for retaining their shares for a specified number of months or years.”
On the surface, this seems like a great idea. You get a bonus for holding your stock for a long time. However, all shareholder claims on company profits come from the same pie. If some shareholders get more, then others must get less.

But so what if some high-frequency trading jerks get a smaller slice of company profits? Who is to say that companies will only use their long-term shareholder bonus programs to shaft day traders? It could easily be abused in a number of ways.

Suppose that a family has controlled a large fraction of a business for over 50 years. If this company’s bonus program only gives bonuses for shares held 50+ years (allowing for inheritances), then they are simply awarding an ongoing yearly bonus to themselves and nobody else.

Suppose that a company grants itself the power to issue stock that is deemed to be long-term stock. Then company insiders who exercise stock options can receive shares that allow them to be treated like long-term shareholders even if they are really short-term shareholders.

It’s true that some companies have multiple classes of stock. For example, Berkshire Hathaway has A and B shares. However, the differences in share rights are fairly easy to understand. BRK B shares have 1/1500 of the economic interest of a BRK A, but only 1/10,000 of the voting rights. Investors can take this into account as they see fit in deciding on the price they’re willing to pay for shares. But a complicated web of different classes of shares based on how long they’ve been held could be made to be very difficult for investors to understand if company insiders choose to make it complex.

I’m cautiously supportive of creating incentives to encourage investor to think about the long term, but we have to be careful about giving company insiders new tools to help them divert more than their share of company profits into their own pockets.


  1. Question that always comes to my mind is - What is the purpose of this change?
    People buy shares mostly to make more money for themselves. If company wants to reward long term owners it has a right to do so in any way it wants. If company pursues any other goal, like stabilize share price, then such measure is just not going to work: it feels like a fixed rate mortgage or like rear loaded mutual fund. Both are hardly advisable.
    IMHO, a very small tax on share purchase would eliminate majority speculations and, therefore, play a stabilizer role much better.

  2. @AnatoliN: I agree with you that changes to taxation seem like a better idea to discourage short-term investing. Diverting a higher proportion of profits to long-term investors has the potential for abuse.