In the UK and US, they have fallen from around 6 years in 1950 to less than 6 months today. 18 Another diagnostic on short-termism is found by looking at company pay-out behaviour. Chart 2 compares dividend pay-out behaviour among companies during two eras – the mid19th century period before shareholder primacy took hold, and the period since 1980 when it has been uppermost in the minds of management (Haldane (2010)). 16  Haldane (2011). 17  Recognition of this problem lay at the heart of John Kay’s proposals, in his review, for an “Investor Forum”. This was a mechanism for bringing together in particular institutional investors to mobilise and strengthen their hand (Kay (2012)). 18  See Haldane (2010). Within this, the move to high frequency trading has contributed to a downwards shift in this average holding period. 8  BIS central bankers’ speeches  In the earlier period, dividends decreased as often as they increased. This is as we would expect if profits fluctuate both up and down. After 1980, however, we see a one-way street. Dividend payout ratios almost never fall. This is evidence that the short-term quest for smoothing shareholder returns has come to dominate payout behaviour, almost irrespective of profitability. Another way to remit profits to shareholders is through share buybacks. These, too, have risen in prominence. Among UK companies, share buybacks have consistently exceeded share issuance over the past decade, albeit to a lesser degree more recently (Chart 3).
Today, that fraction is less than 15%. There has also been a sharp fall in the fraction of shares held directly by individuals, from more than 50% in the 1960s to little more than 10% today. Today, these individual holdings tend to be indirect, operating through investment intermediaries of various types. That means the beneficial owners of shares – individuals – tend to have little direct communication with, involvement in, or indeed knowledge of, the firms in which they are investing. One consequence of a more dispersed and disinterested ownership structure is that it becomes harder to exert influence over management, increasing the risk of sub-optimal decision-making. 17 There is some empirical support for this hypothesis. For example, companies tend to have higher valuations when institutional shareholders are a large share of cashflow, perhaps reflecting their stewardship role in protecting the firm from excessive risk-taking (La Porta et al (2002), Claessens et al (2002)). (c)  Short-termism  A third friction in the manager/shareholder relationship, distinct but related, arises when different classes of shareholder have different rates of time preference. In particular, there have been concerns about the rising share of investors with excessively high discount rates and low holding periods – in other words, about “short-termism” (Kay (2012)). There is clear evidence of the investor scales having rebalanced in this direction over time. Average holding periods of shares have been in secular decline in a large number of countries for a number of decades (Chart 1).