How to get finance from the short term to the long term?
Finance is fixated with short term profits. The average holding period of shares has gone down to three to four months. Yet, we need commitment of investors with companies for long-term value creation. In a new publication in the RSM Series for Positive Change, entitled From Risk to Opportunity - A Framework for Sustainable Finance, Dirk Schoenmaker, professor of Banking and Finance at Rotterdam School of Management, Erasmus University (RSM) proposes to reward long-term investors with loyalty shares. Institutional investors with a buy-and-hold strategy would get extra loyalty shares if they stay for a minimum period, say five or ten years, with a company. In that way, investors are incentivised to move away from the current trading culture to new forms of commitment and engagement with companies.
He argues that when investors are ‘locked in’ in their invested companies, they will engage with these companies to steer them towards sustainable business practices aimed at generating returns in the long term. In this stewardship role, investors can stimulate business to adopt the UN sustainable development goals. The current social and environmental shortfalls, such as child labour and carbon emissions, are a result of the production processes implemented by business.
Schoenmaker: “Loyalty shares can speed up the transition from the shareholder model looking at financial returns to the wider stakeholder model, which also looks at social and environmental returns. Finance can thus become a force for positive change.”
He reminds that earlier attempts to give extra voting rights to long-term shareholders failed, as they redistributed power unevenly among shareholders. “Loyalty shares will not redistribute power. Only shareholders, which stay for an objectively determined minimum period of time with a company, get the extra loyalty shares. The motivation behind this reward for patient capital is the need to switch to long-term sustainable business practices. Long-term commitment from investors would give breathing space to companies to implement and execute long-term strategies, without being haunted by the need to report each quarter high financial profits.”
Education of future financial executives
As part of his thinking, prof. Schoenmaker has integrated this new way of thinking in his classes. Indeed, the RSM Master in Finance & Investments Advanced is a selective and advanced level programme offering demanding content to recognise students of exceptional ability.
This advanced pre-experience programme integrates ethics and sustainability in the core curriculum and thus educates future responsible finance professionals.
Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top 10 business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who can become a force for positive change by carrying their innovative mindset into a sustainable future. Our first-class range of bachelor, master, MBA, PhD and executive programmes encourage them to become critical, creative, caring and collaborative thinkers and doers. Study information and activities for future students, executives and alumni are also organised from the RSM office in Chengdu, China. www.rsm.nl
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