Risk, shareholder pressure and short-termism in financial institutions: Does enlightened shareholder value offer a panacea?
Risk, shareholder pressure and short-termism in financial institutions: Does enlightened shareholder value offer a panacea?
Andrew Keay
Several reasons have been given for the advent of the global financial crisis in 2007. This paper takes one of the reasons, namely the fact that over-leverage and excessive risks were embraced by many financial institutions, and enquires as to why these institutions engaged in such practice. The paper suggests that one of the primary catalysts for this action was a focus on short-termism. The study focuses on two particular elements that led to short-termism, namely an emphasis on quarterly earnings and pressure from shareholders. Consideration is given to the fact that the UK government has endeavoured to encourage less of a focus on short-termism and a greater focus on long-term approach. The paper discusses the government's attempt to do this via the principle of "enlightened shareholder value". The paper then examines whether developments in UK company law and the government's implementation of enlightened shareholder value in the Companies Act 2006 is likely to provide a sufficient measure that will go some way to ensuring that boards will not engage in excessive risk-taking in the future and will refrain from embracing short-termism.
Law and Financial Markets Review, Vol. 5, No. 6, Dec 2011: 435-448.