Much importance has been attached over the last few years to the concept of long-term investment. Short-term shareholdings by institutional investors have been thought to impose unduly short-term requirements on companies to deliver immediate returns.
The issue of short-termism in financial markets is hotly disputed amongst academics and practitioners. Some people argue that there is no compelling evidence of short-termism and, on the contrary, the positive reaction of markets to announcements of corporate R&D programmes, and the willingness of stock markets to attach high valuations to some early stage companies with little or no income streams, point to the long rather than short-term horizons of stock markets.
Short-termism in financial markets is therefore not proven. Nevertheless, there remains a large body of opinion that institutional investors need to take longer-term positions than they have traditionally accepted. Some have responded by doing exactly that.
Unilever and its investors
Long-term capital is closely associated with the related notion of enlightened share ownership. This involves recognising the contribution that stakeholders, in addition to shareholders, play in promoting the success of the company. Long-term ownership is sometimes presumed to promote enlightened shareholdings, on the grounds that the long-term success of a company depends on the engagement of all the relevant parties to the firm.
It is against this background that the recent decision of Unilever to withdraw its plans to shift its headquarters from the UK to the Netherlands should be considered. Its relevance stems from the fact that Unilever was forced to reverse the plans put forward by the board as a result of opposition from its institutional investors.
Still more important was the fact that it was not just short-term institutional investors that forced the reversal but institutional investors, which are regarded as being at the long-term end of the spectrum. This was in part a reflection of the announcement that Paul Polman, the CEO of Unilever, made when he took office that he was intending to shift Unilever to a long-term sustainable basis and if shareholders did not like the focus on the long-term then they should exit.
However, it was several of these supposedly long-term institutions that voiced their concerns about the relocation of Unilever’s headquarters. The primary concern was that the legal framework of the Netherlands offered listed companies a greater degree of protection against threats of control changes. As a consequence, investors would lose the share premium associated with the possibility of such changes.
That might well have been one of the attractions of relocation to the board of Unilever. Its focus on long-term sustainable programmes made it vulnerable to acquirers and activists who saw the potential for immediate capital gains by refocusing the company from sustainability to short-term profitability.
What this emphasises is that, while there might be a relation between long-termism and enlightened shareholder capital, the two are not the same. The share prices of companies that are exposed to takeovers and activist interventions trade above those that are protected from such interventions (“control premia”). These premia are regarded as part of the rights of long-term as well as short-term shareholders, and policies that threaten to diminish them as detrimental to shareholder interests, irrespective of shareholder horizons. Indeed, institutional investors who do not seek control premia are potentially violating their fiduciary responsibilities to promote the interests of their beneficiaries – their investors.
Interpreting control premia
There are two explanations for control premia. The first is that they reflect real efficiencies associated with the potential to restructure firms and take advantage of profitable growth opportunities. The second is that they are essentially just wealth transfers, namely that the premia come at the expense of other stakeholders.
Understanding which is the correct explanation of control premia is important in determining the merits or otherwise of Unilever’s proposed moves. The board of Unilever has been widely condemned for promoting an action that was perceived by institutional investors to be value-destroying. But if in fact that value is created at the expense of other stakeholders, not only does it have adverse distributional effects, it might be long-term inefficient.
Since institutional investors call the tune, Paul Polman will probably not survive the wrath that the Unilever proposal has engendered. But from the start he recognised that this was a risk that he took by running the gauntlet of a corporate policy that put sustainability ahead of immediate profitability. His desire to rationalise Unilever’s corporate structure was not motivated by managerial aggrandisement, as he was coming to the end of his term of office in any event The acceleration of it should not be regarded as a vindication of his opponents.
Instead, Unilever starkly illustrates the impediments publicly listed companies face when trying to adopt corporate models that do not preserve shareholders’ existing control rights. It may be one of the reasons for the declining number of publicly listed companies in the UK and US, and why some are finding private equity an attractive alternative to remaining public.
The conclusions of the first phase of the British Academy programme on the Future of the Corporation will be published on 1 November 2018.
Professor Mayer’s book Prosperity: Better Business Makes the Greater Good will be published by Oxford University Press in November of this year.