In January, I wrote this post on how short-term shareholders are the root of all evil: Observation Number 7 – Short-term Gratification Killed the West.

Which I still think is true.

But that doesn’t necessarily mean that long-term shareholders are going to be any better at pushing for the creation of economic value. And I’m going to reference Jesse Fried from Harvard, who has written a paper on it.

But before I get to the problem with long-term shareholders, here’s a quick recap of the short-term shareholder incentive issue:

  1. Under the principle of shareholder value maximisation, the management of companies are incentivised to generate the best returns for their current shareholders.
  2. The average holding period for a share is, on average, 7 months.
  3. This means that management have a 7 month time-frame, at any point in time, to generate returns.
  4. Which basically results in a rape-and-pillage of company assets to get satisfaction short-term.
  5. And the long-term projects, that could generate greater wealth in the long term, will be sacrificed.
  6. And some costly projects that would allow the company to continue functioning (like maintenance and replacement of machinery) are delayed until the last possible moment.

One conclusion we could draw from this is that long-term shareholders would push for more investment in long-term projects and long-term growth.

But would they?

I’d like to answer that question with an adage: “there’s more than one way to skin a cat”.

Some illustrations:


Which is exactly what this paper is saying. Over the long term, does it benefit long-term shareholders more:

  • when companies invest in more long-term projects; or
  • when they buy back their stock from the short-term shareholders when the share price is at “a bargain”?

Certainly, from the evidence, the answer seems to be option 2. Because, on average, in any five year period, a US firm will transact (as in: buy or sell) in over 40% of its market capitalisation (shares issued x share price).

Summary: here’s my theory: the root of all evil is shareholder value maximisation.

So bugger the shareholders, and operate for the company’s own sake. And because it is the lifeblood of a whole host of stakeholders: including customers, suppliers and employees.

Yes – it sounds quite Marxist. I’m not sure if that’s such a bad thing.