LONG-TERM THINKING

November 10, 2021

What would you do to improve the way the global corporate system works?

At Kennox, we see great strength in the current corporate system, which includes the creation, growth and interaction of an enormous range of companies. Whilst there are unquestionably significant problems, these corporates are an essential part of the market-based ecosystem that has steadily increased living standards for so many across the globe for so long.

For this system to continue and to thrive, it is imperative that (enough) investors focus on risks over the long term. Decisions that risk this long-term sustainability should be discouraged, and ones to protect it encouraged. It’s not that every player needs to think in the long term, certainly many won’t. But there needs to be a critical mass of considerate and balanced long-term investors – these are essential to protect the benefits that so many individual companies, and all together the entire corporate and market-based system, bring to society.

What needs changed? Here are a few concrete actions that Kennox would suggest that would encourage this long-term thinking and behaviour:

  • Take away the tax advantage for the deduction of interest expense.
    • Incentivising more debt increases the likelihood of over-leveraging and destabilising a business.
  • Modify the tax incentives so that companies are inclined to increase dividends for shareholders who hold for longer.
    • For instance, Air Liquide in France already does so.
  • Likewise, increase the voting rights for shareholders who hold for longer.
    • Shareholders who are aligned to longer-term decisions should have more say.
  • Restructure management remuneration to pay the majority of bonuses in the form of shares that can’t be sold for a decade.
    • This starts to align management’s risk focus to match the desired long-term sustainability time frame.
  • Make quarterly reporting optional.
    • The market should focus on the long term, not the short term.

The corporate system isn’t broken but it could certainly do with improvements. Let’s think ahead and protect it.

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