How can large shareholders contribute to long-term value creation?
Shareholders who hold at least five per cent of a firm’s shares are more likely to act as a steward to the company and create long-term value than shareholders who hold fewer shares. Yet, in 2016 such blockholders collectively only owned 24.1 per cent of shares, down from 34.6 per cent in 2006. Those were among the results of a study conducted by a team of researchers that included Prof. Abe de Jong and Prof. Dirk Schoenmaker from Rotterdam School of Management, Erasmus University (RSM). The report, Large shareholders in corporate governance (PDF), was commissioned by the Dutch Monitoring Committee Corporate Governance and advises on how firms can create long-term value in these changed governance conditions.
Large shareholders, such as venture capitalists, but also institutional investors and individuals, are known to operate as stakeholders with a long-term strategic interest in a company, the researchers state. They remain invested in a corporation over a longer period, and have the voting power to look beyond quick returns and stimulate firms to keep adding value in the future. Having these long-term goals can potentially also create positive effects for society.
In the study, the researchers were interested to find out to what extent blockholders are still present in Dutch Exchange-listed companies, and what motivates them in their voting behaviour.
Through analysis, surveys and in-depth interviews the research team first discovered that the average firm has 2.3 blockholders with a stake of five per cent or more. Nearly half of the surveyed blockholdings was established more than 10 years ago, although hedge-funds -that invest more actively- were not included in the survey, due to their more secretive nature.
The surveyed large shareholders indicated that their investment horizon is around 2.5 years on average. The large shareholders also indicated to value financial stability, and to be primarily motivated to create long-term value. Nevertheless, the percentage of blockholders dropped from 34.6 in 2006 to 24.1 in 2016.
So, what holds investors back from keeping blockholdings in companies? Periodic benchmarking of company performance was seen as a mechanism that triggers short-term thinking of investors and portfolio managers, many of them reported.
From the results of the study the researchers were also able to distil a set of conditions for long-term value creation. Among them were a long-term horizon to invest with a typical holding period of more than five years and an active investment strategy with a concentrated portfolio. How a portfolio performs should also be assessed on how much financial and societal value a firm adds in the real economy, and not by measuring it against market benchmarks that allow for little deviations, the researchers argue.
More in general, they recommend that asset owners, asset managers and companies become more aligned on a mandate based on long-term value creation. Also, long-term investors could be incentivised through loyalty shares, which provide an additional reward to shareholders if they have held on to their shares during a so-called loyalty period of three, five or ten years.
Read the study and the full list of conditions in Large Shareholders in Corporate Governance (de Jong, A, Schoenmaker, D, Gruenwald, M, & Pala, A., 2018).
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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