• 07 Dec 2012 at 3:48 PM

Al Gore Wants You To Conserve Your Shares

Here is a pleasing story that is probably not a thing, but still a thematically relevant non-thing:

Corporations would award long-term shareholders “loyalty rewards” of extra dividends, warrants, and additional voting rights as incentives to overcome short-term earnings focuses of corporations and investors, according to a concept Mercer is developing with two other organizations.

Good luck with that, Mercer, “who is working on the project commissioned by Generation Foundation … [which] is an advocacy arm of Generation Investment Management, whose chairman is Al Gore.” There’ll be a report by the fall so stay tuned. For a report.

I like it! For two reasons, one good, one evil. First, good: why shouldn’t companies decide what sort of a thing shareholding is? The old notions of public-company shareholding – shareholders own the company, companies owe them fiduciary duties, one share one vote, etc. – all seem to be eroding.1 That seems good! “Shareholders provide money and in exchange they own the company” is a shorthand; really shareholders provide money and get some sort of bundle of rights – embodied in the corporate and securities laws and the corporate charter and bylaws – giving them residual cash flows and a vote and whatever else.

Change that bundle of rights and maybe they’ll provide more money, maybe they’ll provide less; maybe the company – and perhaps its residual cash flows – will perform better because the shareholders will be longer-term or quieter or louder or more or less inclined to meet with management or whatever. Mercer’s particular change to the bundle of rights would seem to reduce those rights – as in, it will reduce shareholders’ ability to transfer their shares – but in exchange, I suppose Mercer hopes, they’ll get a better company. If it works, that’ll be great, if not, not; why not find out. Let a million shareholder-loyalty-rewards-programs bloom.

Also: something something something high-frequency trading! I imagine an algorithm stopping to scratch its little algorithm head and ask, “well, what if instead of trading this stock eight thousand times in a second, I just hold on to it for a few years and get an extra dividend?” And then deciding to be a buy-and-hold, management-friendly value investor.

But, second, evil: won’t it be fun to find ways to get around this? Once upon a time shareholders had even more power to, for instance, buy up all the shares of a company and then yell “surprise! I bought up all your shares!” But then the Williams Act (13-Ds!) and the Hart-Scott-Rodino Act (antitrust filings!) changed that, and now you have to tell everyone before you buy more than a medium-sized amount of a company’s shares, and so your ability to mess with company managements is constrained. And so also: an industry exists, and bankers are well compensated, to help you get around those rules! You can get around HSR with options. You can get around securities-law disclosure by … well, by buying really fast, but more usefully (and less certainly) by buying on swap.

“Rewarding long-term shareholders” is open to similar games.2 If this becomes a thing – I’m not holding my breath, but you never know – I look forward to seeing investors find ways around it. Got some long-seasoned shares? Write a swap on them! It’s better income than stock lending.

Or even better, buy shares now, put them in a pot, season them, get your outsized-votes-and-dividends, and then sell ownership interests in the pot. “Mr. CEO, the portfolio manager at Lockbox Capital Management is here to see you. They’re our oldest shareholder. But they keep changing portfolio managers. This week it’s Carl Icahn.”

Mercer seeks long-term shareholder rewards program from corporations [Pensions & Investments]
Doing the Shareholder Sidestep [DealBook]

1. One-share-one-vote is kind of passé, fiduciary duties are optional, shareholder “ownership” and primacy is under attack from academics and Mark Zuckerbergs alike, etc.

Also, in more practical terms, definitely read this, about mean ways that companies have gotten around shareholder … rights … in recent deals. “Rights” is in skeptical ellipses there because they’re not rights; if they were rights the companies couldn’t have gotten around them. But the shareholders feel aggrieved. “What do you mean you can go buy two companies and dilute us by 8% and we don’t get a vote!?,” the Freeport-McMoRan shareholders ask. But that’s the rule, man. Anyway some of the rules are silly and companies are going to the full extent of their ability to avoid them.

2. In fact, you might consider that every public company has exactly one shareholder, and it’s been the same since they went public (or earlier), and it’s DTC. (Actually I think it’s Cede & Co. but same diff.) Weird, right? But DTC owns all the shares in all the companies; everyone else just owns participations in DTC. This, of course, is no problem – the securities-law concept of “beneficial ownership” got around it decades ago, you don’t get to say “oh I didn’t file a 13-D because I don’t own 15% of that company, DTC does” – but still, it bears pondering. Sell beneficial interests several levels up, etc.

6 comments (hidden to protect delicate sensibilities)
Show all comments ↓

Comments (6)

  1. Posted by Guest | December 7, 2012 at 4:20 PM

    Will there be blackout dates?

  2. Posted by Realist | December 7, 2012 at 4:21 PM

    Neither of those things are things – they just state the obvious – 1) that companies, legislatures and courts set the ground rules of the game and 2) the players will play by the rules to their greatest advantage. There's no a priori "best" game or game set-up. Changing the rules of the game to make it "better" begs the questions: better for who, for what purpose? If someone doesn't like the public company game, put your money in a mattress; OR put your money where you mouth is, tender for a company being penny-wise and pound-foolish and take it private. You no likey those options? Then STFU.

    - guy who doesn't wish everything would be just the way he wants it

  3. Posted by lucas | December 7, 2012 at 4:47 PM

    Can you split the outsized voting power based on the diverging preferences of the pot co-owners? If not, that's a big downside.

  4. Posted by Seattleite | December 7, 2012 at 5:35 PM

    No co-owners, man, it's mine!

  5. Posted by Jimmy Cayne | December 7, 2012 at 5:37 PM

    Whoa dude, I know a lot about pot, and a lot about downside, and have no idea what you're talking about.

  6. Posted by Excelsior | December 7, 2012 at 5:44 PM

    I don't see a clause about how to deal with ManBearPig