Long-term shares

Jamie Carnie

A major structural problem with capitalism as it exists in Britain today is that businesses, driven ultimately by the short-term interests of their share-holders, do not invest adequately in their long-term future. It is not easy for a director to justify substantial expenditure on research and capital investment designed to produce a profit in perhaps five to ten years time to his shareholders - if they are more concerned about getting a good dividend this year or about being able to sell their shares next year for a profit.

Even long-term investors such as the major building societies, insurance companies and pension funds rarely look more than one or two years ahead, and if anything the weight of their substantial presence reinforces the short-termist pressures of the investment marketplace. As a result we are losing out to countries such as Japan where a government ministry (MITI) has been responsible for encouraging and coordinating long-term research and development in industry.

This situation could be rectified relatively easily, by means of a new instrument in the stockmarket, the heart of the capitalist system, which would provide a counter-balance in favour of long-term industrial vision. This instrument would take the form of 'long-term shares' whose issue and purchase would be a legal requirement.

'A counter-balance in favour of long-term industrial vision would take the form of 'long-term shares' whose issue and purchase would be a legal requirement'

A law would be introduced requiring companies to issue a certain minimum percentage of 'long-term' shares whenever they issued new ordinary shares. Perhaps 10 per cent of the total value of the issue would need to be made in the long-term form. (A formula would be devised to require companies with existing shares to replace a proportion of these by long-term shares over time, perhaps with some support from government.)

The long-term shares would be traded in a special parallel long-term stockmarket. The new type of shares would be like any other shares except that when bought by someone they could not then be resold until a further five years had elapsed; they would then have to be sold by the owner during the subsequent year, or held for a further five years. and so on. Long-term shares would be identical to any other type of share. Owners of them would count as owners of the company in the normal way, and would have normal voting rights at shareholder meetings and during takeover bids.

'A requirement for all individuals and companies who own more than a certain total floor value of shares to hold at least 10 per cent of them in long-term shares'

Obviously these shares, with their restriction on when they could be sold, would not be popular, so the same law would phase in a requirement for all individuals and companies who own more than a certain total floor value of shares to hold at least 10 per cent of them in long-term shares of their choice. (This floor value would perhaps be somewhere around 20,000 in order to exclude the small individual investor who might otherwise be frightened off from investing at all, but to include the very wealthy and the major institutional investors.)

'The new shares would compel boards of directors to plan and invest for the future in an unprecedented way'

What would the effect of this be? Obviously those people who held the long-term shares of a company (and who could not get rid of them until five years had passed) would be very interested in ensuring the long-term health of the company, a message which would come through forcefully at shareholder meetings. The existence of the new shares would enable, and indeed compel, boards of directors to plan and invest for the future in an unprecedented way.

Some other points of detail: it may be necessary to allow the sale of long-term shares before their five-year term in exceptional but well-defined circumstances - eg bankruptcy of the owner. Clearly UK investors purchasing shares on foreign markets would have to remain subject to the law. If they were not required to purchase 10 per cent of the value as long-term shares on the UK market there would be a stampede of money out of the country. The situation for foreign investors purchasing into the UK market is less clear and would have to be thought out carefully. This requires more technical knowledge of the detailed workings of the global investment market than I possess, but there seems to be no reason in principle why foreign investors should not be allowed to carry on as now, without being subject to any requirement to buy long-term UK shares.

There would almost certainly be an adjustment period where overall UK share prices would probably change considerably upon the introduction of such changes, but the market would soon restabilise and should then carry on as normal. The adjustment period would have to be planned carefully and may require some financial support from the government, but the long-term benefits to the UK economy of the changes would potentially be considerable.

James Carnie, 96 Carlingcott, Bath BA2 8AW (tel 0761 436945).

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