Abstract
This chapter examines the development of the short-termism concept from when it was first clearly articulated as an issue in the 1970s in response to concerns of hostile takeovers of primarily US companies, to its wide-spread usage post-global financial crisis. This examination of the development of the short-termism concept brings to the forefront the question of whether such short-termism is a substantive issue or if it is instead merely compelling rhetoric that overlaps with the capital market concerns of the day.
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Notes
- 1.
Rappaport (2011, 5).
- 2.
See Haldane and Davies (2011, 2), which refers to historical examples of classical economists such as William Stanley Jevons, Alfred Marshall, Arthur Pigou and John Maynard Keynes grappling with the short-termism concept.
- 3.
Roe (2013, 979).
- 4.
Lipton (1979, 104).
- 5.
For example, these shake ups included the hostile takeovers of TWA in 1985 and Gulf Oil in 1984 respectively, by so called ‘corporate raiders’ Carl Ichan and T. Boone Pickens, and the leveraged buyouts which followed thereafter, including most notably the management buyout of RJR Nabisco in 1988.
- 6.
See Gilson and Kraakman (2005), in which the authors reviewed the impact of Mr. Lipton’s 1979 paper.
- 7.
Lipton (1979, 104).
- 8.
Ibid.
- 9.
Ibid., 109–110.
- 10.
‘Shareholder rights plans’, known colloquially as ‘poison pills’, are a takeover defense mechanism developed by Martin Lipton in 1982 which, when adopted by a company, provide for existing shareholders to purchase significant additional shares at discount if the company is the subject of a takeover offer. A detailed description of poison pills is set out in Gilson and Bernard (1999, 10–18). Client interests, namely the interests of incumbent boards, may have been part of Lipton’s motivations in developing this mechanism to prevent takeovers. However, a key position in his 1979 paper (at 105) is that there is a public policy interest in defending against takeovers that would adversely impact corporate long-term planning, and it is not a stretch to argue that this was a rationale for developing the poison pill.
- 11.
See Gilson and Kraakman (2005) summarizing the impact of Lipton (1979) on the development of Delaware takeover law, which reviewed the Delaware Chancery and Supreme Court case law and notes at 1430 that “Lipton ultimately persuaded the Supreme Court that the problem of allocating discretion between boards and shareholders in hostile takeovers could be resolved by abstract principles.” These abstract principles were adverse impact on corporate long-term planning caused by the threat of hostile takeovers.
- 12.
Rappaport (2011, 10).
- 13.
Easterbrook and Fischel (1981, 1184).
- 14.
- 15.
Porter (1992, 67–68).
- 16.
Ibid., 73.
- 17.
Jacobs (1991, 7–8).
- 18.
Rappaport (2011, 11).
- 19.
Ibid.
- 20.
See the summary in Kraakman et al. (2009, 35–36).
- 21.
Ibid., 35.
- 22.
Ibid., 36.
- 23.
Ibid., 12.
- 24.
Ibid.
- 25.
Ibid.
- 26.
Kay (2012).
- 27.
Ibid., 30–31.
- 28.
Cleary (2015, 11).
- 29.
Rappaport (2011, 13).
- 30.
Healy et al. (2003).
- 31.
“Report of Investigation by The Special Investigative Committee of the Board of Directors of Worldcom, Inc.” US Securities and Exchange Commission. Online: https://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm.
- 32.
Farrell (2015).
- 33.
Salter (2012).
- 34.
See the discussion on the societal costs of SMST in Chapter 7, Sect. C.
- 35.
Rappaport (2011, 13).
- 36.
- 37.
Graham et al. (2005).
- 38.
Net Present Value (NPV) Definition, Investopedia. Online: https://www.investopedia.com/terms/n/npv.asp#ixzz5RUe3nec8.
- 39.
Donaldson (2005).
- 40.
Krehmeyer et al. (2006).
- 41.
Tonello (2006).
- 42.
Commission on the Regulation of Capital Markets (2007, 5).
- 43.
Jacobs (1991, 2–9), where Jacobs provides evidence of declining US competitiveness relative primarily to Japan and Germany.
- 44.
Word Data Bank. Online: http://data.worldbank.org (GDP at Current US$ Prices) shows a relatively steady increase of GDP in the UK from US$130 billion in 1970 to pre-GFC peak of US$3.074 trillion in 2007 and in the US from US$1.076 trillion in 1970 to pre-GFC peak of US$14.719 trillion in 2008.
- 45.
Business Wire (2009).
- 46.
Farrar and Mayes (2013).
- 47.
Ibid.
- 48.
For a comprehensive analysis of the causes of the GFC, see the Dissenting Statement of SEC Commissioners Keith Hennessey, Douglas Holtz-Eakin and Bill Thomas, ‘Causes of the Financial and Economic Crisis’, Financial Crisis Inquiry Commission (27 January 2011), which statement identifies ten essential causes, namely the credit bubble, the housing bubble, nontraditional mortgages, credit ratings and securitization, financial institutions concentrated correlated risk, leverage and liquidity risk, risk of contagion, common shock, financial shock and panic and that the financial crisis caused an economic crisis.
- 49.
Jackson (2009).
- 50.
Pearlstein (2009).
- 51.
For example, Moore and Walker-Arnott (2014), Rappaport (2011), Chapter 2 ‘Short-Termism Produces a Financial Crisis’; and also see the statement on short-termism in The Modern Corporation: Corporate Governance for the 21st Century, Statement on Economics, para 3. Online: https://themoderncorporation.wordpress.com/economics-and-msv/, signed by over 80 academics. Commenting on the post-GFC state of capital markets, this Statement on Economics asserts that “short-termism prevails and investment in productive capability diminishes”.
- 52.
Dallas (2012, 267).
- 53.
See Dallas (2012, 281–293), where Dallas reviews the sub-prime mortgage market in the US, and the layers of complexity of the securitization of these products, the collapse of which she argues lead to the financial crisis. Dallas used this financial crisis as a starting point for re-examining the role of short-termism in capital markets. Similarly, Kay 2012 was an examination of broader market failings post-GFC, and Dominic Barton cites the “near meltdown of the financial system” as the reason for his call to re-orient capital markets towards a longer-term approach (Barton 2011, 85).
- 54.
Pub. L. 111–203, H.R. 4173.
- 55.
Dallas (2012, 323–358).
- 56.
The Dodd-Frank Act, Recital.
- 57.
“Text of Obama Remarks on Dodd-Frank.” Market Watch. 21 July 2010. Online: https://www.marketwatch.com/story/text-of-obama-remarks-on-dodd-frank-2010-07-21 and “Wall Street Reform: The Dodd-Frank Act” The White House President Barrack Obama. Online: https://obamawhitehouse.archives.gov/economy/middle-class/dodd-frank-wall-street-reform.
- 58.
- 59.
Aspen Institute (2009).
- 60.
Ibid., 3.
- 61.
Ibid.
- 62.
Strine (2015, 4). Chief Justice Strine’s comments on this topic are significant given Delaware’s prominence as a corporate domicile for most US companies.
- 63.
Ibid., starting at 6.
- 64.
Gallagher (2015).
- 65.
Jacobs (2012).
- 66.
Ibid., 1658.
- 67.
Biden (2016).
- 68.
Jacobs (2015).
- 69.
“President Donald J. Trump Puts American First in Tax Relief.” The White House, Office of the Press Secretary. 27 September 2017. Online: https://www.whitehouse.gov/the-press-office/2017/09/27/president-trump-puts-americans-first-in-tax-relief.
- 70.
Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, a congressional revenue act originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA), Public law no. 115–197.
- 71.
Merced and Phillips (2018).
- 72.
- 73.
See Haldane and Davies (2011), Davies et al. (2014), and commentary on short-termism in the UK by Will Hutton in How Good We Can Be, 2015 Little Brown Books Publisher and his opinion pieces in The Guardian, including “‘Quarterly capitalism’ is short-term, myopic, greedy and dysfunctional” The Guardian (26 July 2015).
- 74.
Kay (2012, 5).
- 75.
Ibid.
- 76.
Ibid., 13.
- 77.
- 78.
Kay Review Government Response, Ev4.
- 79.
- 80.
White (2013).
- 81.
Corporate Governance Reform (2016).
- 82.
Ibid., 24 and 32.
- 83.
- 84.
Promoting Long-Term Wealth (2017).
- 85.
European Union Green Paper (2011).
- 86.
Ibid., 2.
- 87.
Ibid.
- 88.
Ibid., 3.
- 89.
Ibid., 2 and 12.
- 90.
Ibid., 3.
- 91.
Ibid.
- 92.
Ibid., 12.
- 93.
Directive (EU) 2017/828 of the European Parliament and of the Council, of 17 May 2017, amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (effective as of 9 June 2017) (EU Amended Shareholder Rights Directive).
- 94.
UN Global Compact, ‘Short-Termism in Financial Markets.’ Online: https://www.unglobalcompact.org/take-action/action/long-term (UN Global Compact: Short-Termism).
- 95.
“Institutional Investors and Long-Term Investment.” OECD. Online: http://www.oecd.org/pensions/private-pensions/institutionalinvestorsandlong-terminvestment.htm.
- 96.
- 97.
UN Global Compact: Short-Termism.
- 98.
For example, see Chen et al. (2014).
- 99.
- 100.
Barton (2011, 86).
- 101.
Jacobs (2015).
- 102.
Barton (2011, 87).
- 103.
- 104.
Barton and Wiseman (2014, 46).
- 105.
McGee (2016).
- 106.
Turner (2016).
- 107.
Oyedele (2017).
- 108.
Fink (2018).
- 109.
Tulay (2017).
- 110.
Turner (2016).
- 111.
Oyedele (2017).
- 112.
Fink (2018).
- 113.
Ibid.
- 114.
Commonsense Corporate Governance Principles (2016). Online: http://www.governanceprinciples.org/.
- 115.
Ibid., 8.
- 116.
Ibid., 6.
- 117.
World Bank Open Data. Online: https://data.worldbank.org/ shows that from its post-GFC low of US$2.383 trillion in 2009, the UK GDP (in current US$) has risen to US$2.622 trillion in 2017 (which growth has presumably been impacted by the UK vote to leave the EU in 2016), and the US GDP has steadily risen from its post-GFC low of US$14.419 trillion in 2009 to US$19.391 trillion in 2017.
- 118.
World Bank Open Data. Online: https://data.worldbank.org/ shows that from a global (current US$) post-GFC low of US$60.267 trillion in 2009, GDP has rise fairly steadily to US$80.738 trillion in 2017.
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Willey, K.M. (2019). Short-Termism, an Evolving Concern?. In: Stock Market Short-Termism. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22903-0_3
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