Good companies need to talk to us less

We’ve written a lot about how wrong-headed incentive payments to corporate executives, alongside short-termism from the market’s big investors, have damaged Western economies. When everyone’s making money out of short-term share price moves, no-one is paying attention to the long-term investments that companies need to make to create sustainable growth.

All sorts of solutions have been suggested. We agree with Andrew Smithers that a starting point is to change the way CEOs are incentivised. And we have some sympathy with the idea that investors should be rewarded in some way for holding shares for the long term.

We like the idea, for example, of tiered dividends – the longer you hold, the higher a pay out you get (although we have no idea how that would work legally). But here’s another simple idea from the The Generation Foundation (a group dedicated to “sustainable capitalism”).

It suggests doing away with the ridiculous business of companies constantly offering “earnings guidance” to the market. Constantly guiding expectations “implicitly highlights near-term performance”, and distracts attention from long-term prospects.

It allows CEOs, with their own compensation in mind, to “engage in questionable practices” to move the share price around at times that suit them. It prevents analysts from thinking for themselves and properly analysing the company in question. And finally, it commits management to short-term targets “at the expense of reduced flexibility in their business strategy”.

Look at it like that and you might begin to think that life would be better if listed companies actually offered the markets rather less in the way of information.

It has long been thought that good companies providing regular earnings guidance reflects good corporate governance. But perhaps it just provides cover, and an excuse for what is effectively bad corporate governance. In which case, it is time good companies gave it up.

  • jimtaylor

    “We like the idea, for example, of tiered dividends – the longer you hold, the higher a pay out you get (although we have no idea how that would work legally).”

    I suspect it might be difficult to pay a different dividend per share to investors depending on length of holding time.
    It would be easier (legally) to pay the same dividend to everyone and then pay an additional bonus payment per share where the bonus depends on length of time and the total payout would be the same, just distributed amongst shareholders differently.

    This would suit LTBH investors, who either invest for income or recognise the effect of reinvested dividends on long term total return, and the bonus element would be a reward for loyalty in terms of helping the long term liquidity of the company.

  • joerg.standfuss@psi.ch

    Something to the effect of tiered dividends could be created over the tax system. The longer you hold a stock the less tax you pay on your dividends. We had something like this in Germany where dividends were tax free if stocks were hold longer then a year. They changed this unfortunately. Was good to feed our politicians but probably not so good in encouraging long term investments.

  • Pinkers Post

    ‘Guidance’ should be declared a dirty word! We are all sick and tired of the Nanny State.

  • Russell Bruce

    Hi Merryn

    There has been a bit of disagreement between yourself, John Stepek and Bill Bonner over Scottish Independence. Today he has a quote from you which seems less than reasoned from a senior journalist.

    “If Scotland votes for independence it will be as a socialist nation not a wealthy capitalist one. The result will be profound misery… I really don’t think it is something to wish for… Already a disaster in the making… What small countries actually do these days if they aren’t tax havens full of educated people (Switzerland) is indulge in one variety or the other of nepotism/theft/corruption/public sector crowding out and then collapses.”

    Did you really say this? Have you looked at the economic performance of other small northern European countries? Do you know just how successful the Scottish Government has been in attracting inward investment?

    It is easy to pander to southern misconceptions but as it is frequently mentioned you live in Edinburgh -this implies that you have some understanding of the political and economic situation in Scotland. This quote suggests otherwise.

  • MikeR

    I too quite like the idea of tiered divis, especially the method suggested by jimtaylor. Getting execs pay in check may be more troublesome accompanied by squeals of false protest but I have a cunning plan.
    Some few years back the average board member was paid something like 17x the level of company workers; now it’s more like 70x and rising. In the long run this is not sustainable; in the meantime it is damaging to individual companies, to shareholders and to the wider economy. My idea is to use tax incentives. Company execs paying themselves the historic 17% level would be eligible for zero rate tax but the more they grab the higher the tax rate. Oh yes! They would be legally obliged to state that at the top of every company report.
    Just don’t expect the fat turkeys in government to vote for that particular Christmas.

Merryn

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