An extended performance horizon for earning bonuses can have a positive impact on the time horizon of executives
INTERVIEW - Remuneration policies matter
SHIFTTO Editorial Board member Rients Abma is Executive Director of Eumedion, an independent foundation that operates as a representative of the interests of institutional investors in the field of corporate governance and sustainability. Eumedion initiated a research project that resulted in a groundbreaking report , ‘Focusing on the Short or Long Term? The Causes and Consequences of the Time Horizon of Management of Dutch Listed Companies, in mid-2017.
Q: Rients, what was Eumedion looking for with this report?
'Short-termism has received a lot of attention lately, in the public as well as in the political domain. We wanted to know whether and to what extent Dutch listed companies focus on creating short-term value. Moreover, we wanted to know more about the causes and consequences of the time horizon applied by the boards of Dutch listed companies in the decision-making process. This may be helpful in determining whether and to what extent institutional investors can play a role in influencing the time horizon of executives and its consequences.'
Q: Were there any surprises for you in the results?
'One of the surprising results was that the (Dutch) executives’ time horizon does not seem to influence decision-making related to either a short-term or a long-term focus, e.g. R&D expenditures, expenditures on marketing and branding campaigns, and sustainability investments. This may reflect the Dutch corporate governance model, which provides executives discretionary power to make strategic decisions relatively independent from demands of shareholders.'
Q: This report represents some significant ‘firsts’, including the first use of an interesting, concrete research method** that had never before been used in a non-Anglo Saxon research context, but had been used in an earlier American study. How/why did the researchers choose this novel method?
'The academic and political discussion on short-termism (also in the Netherlands), was in particular based on American research regarding the behaviour of executives of US listed companies. However, the US corporate governance model of shareholder primacy differs significantly from the Dutch stakeholder model, in which boards have a statutory duty to weigh the interests of all stakeholders ( including those of employees, suppliers and clients) when making important decisions, such as changing the company’s strategy, including the sale of major parts or the whole company.
Therefore we requested that the researchers use the same methodology as was used for studies regarding the (consequences of the) time horizon of executives of US listed companies, for measuring the time horizon of executives of Dutch listed companies and its consequences. As a result, it was possible to compare the outcomes of the US studies with those of our study.'
Q: Looking at the results, what are the factors that account for long or short term focus in companies?
'Our study shows that companies that have relatively more long-term oriented shareholders and use more incentive-based remuneration policies with long-term vesting periods, tend to have a stronger long-term focus.'
Q: What can the US learn from the Netherlands in this regard?
'The results of our study indicate that how fiduciary duties are formulated matter: companies incorporated in countries in which the directors’ primary duty is to shareholders, seem more vulnerable to short-termism than companies in countries where directors are legally obliged to consider the interests of all stakeholders when making important decisions. The results also show that the design of remuneration policies is important: an extended performance horizon for earning bonuses can have a positive impact on the time horizon of executives.'
Q: Is there anything the Netherlands can learn from the US?
'The Dutch multi-stakeholder approach should not erode accountability of policy choices made by board directors towards the shareholders of the company. Accountability of US company directors is very strong with a clear trend towards annual (re-)election of the directors and majority voting. In the Netherlands there are signs of an opposite trend: the introduction of higher thresholds for shareholders to remove directors and for cancelling the binding nominations for re-election and – incorporated in the plans of the new Dutch government – the possibility for the board to invoke a stand-still period of 250 days when a shareholder submits a proposal to remove one or more board members.'
Q: Any advice for helping organisations to create a long-term time horizon in their management?
'This can be taken directly from the report: ‘First, companies may seek to develop stronger relationships with shareholders having a long-term horizon. Our research shows that having a larger investor base consisting of shareholders with a long term interest in the company is associated with a stronger long term orientation. Increased shareholder engagement may therefore be important in developing stronger relationships between management and shareholders. Second, remuneration policies matter. In particular, developing remuneration contracts focusing more on long-term value creation helps in shaping the long term orientation of company management.’
Q: Finally: How will Eumedion use the knowledge created in this study?
'We will use the outcomes in our collective conversations with remuneration committees of companies regarding the design of remuneration policies: we will push for extended performance periods. Moreover, the outcome that companies that have relatively more long-term oriented shareholders strengthens our work for introducing a Dutch Stewardship Code. This code ‘nudges’ the promotion of sustainable, long-term value creation by Dutch listed companies by responsible, really engaged institutional investors. This result also supports our plea for explicitly incorporating in the fiduciary duties of directors of European institutional investors the obligation to take long-term sustainability and governance factors into account – as well as financial factors – when making investment and voting decisions.'
**Research is based on assessing long-term vs short-term language using information from 1,444 quarterly conference calls for a maximum of 60 companies over the period 2003-2016.
Executive director of Eumedion, the Dutch Corporate Governance and Sustainability Platform for Institutional Investors. Also a member of the Dutch Accounting Standards Board and its Nominating Committee, member of the Netherlands Authority for the Financial Markets (AFM) Financial Reporting & Accountancy Committee and of the AFM Advisory Panel of Representative Organisations, member of the Advisory Board of the Business and Law Research Centre of the Faculty of Law of the Radboud University Nijmegen and member of the Editorial Board of the journal ‘Goed Bestuur’ (‘Good Governance’).
Between July 2007 and September 2011 Board member of the International Corporate Governance Network (ICGN). Currently, he is member of ICGN’s Shareholder Rights Committee, Nominating Committee and Awards Committee. Rients Abma earned his Masters degree in General Economics, with concentrations in Monetary Economics.