Mark Roe & Cenz Venezze, Will Loyalty Shares Do Much for Corporate Short-Termism?, 76 Bus. L. 467 (2021).
Abstract: Stock-market short-termism—stemming from rapid trading and activists looking for quick cash—is, a widespread view has it, hurting the American economy. Because stock markets will not support corporate long-term planning, the thinking goes, companies fail to invest enough, do not do enough research and development, and buy back so much of their stock that their coffers are depleted of cash for their future. This widespread view has induced proposals for remedy. One major proposal is for corporate “loyalty shares,” whereby stockholders who own their stock for longer periods would get more voting power than those who trade their stock quickly. That voting boost would, it’s hoped, support stability and sound long-term planning. Venture capitalists have already obtained the go-ahead from the Securities and Exchange Commission to found the “Long-Term Stock-Exchange,” as it is called—whose centerpiece has been loyalty shares and their concomitant voting boost for companies on the new exchange. In this article, we show why loyalty shares promoters’ thinking is overly optimistic. Facilitating insider control will be loyalty shares’ dominant motive and effect. Long-term thinking, planning, and investing will be weaker motivations and effects. Indeed, loyalty shares will at times undermine long-term planning at companies that use them.Loyalty share voting boosts would shift voting power in those U.S. public companies that adopt them, but they will not shift voting power toward shareholders most likely to promote the long-term. Instead, we should expect loyalty shares to empower conflicted corporate players who seek not more corporate focus on the long-term but to better protect themselves and their corporate positions. Controller-insider self-interest will dominate their motivation, not fighting short-termism, because insiders have self-interested reasons to lock in control and shut down outsiders, even if doing so fails to improve corporate time horizons. Policymakers with a bona fide long-term vision will find themselves frustrated by the outcome. Existing data from Europe, where loyalty shares are more extensively used thus far than in the United States, supports this structural analysis. Control motivations dominate; long-term motivations are pale or absent from the on-the-ground practice. Other reasons—as yet undiscussed as far as we can tell—may well justify opening corporate law to loyalty share programs. We introduce to the loyalty share analysis the ex ante value to the entrepreneur of retaining control—i.e., loyalty shares can help to motivate founders and thereby induce new entry, new start-ups, and new, original entrepreneurial activity. Weighing the value of continued control in fostering start-ups and original entrepreneurial activity against its later costs is not easy and it is not obvious which weighs more but, if there is economy-wide value to loyalty shares, that motivational value is where it is likely to reside. For short-termism, policymakers should be skeptical that promoting sound corporate long-termism will be a major result of facilitating loyalty shares in the American corporation.