"L-Shares: Rewarding Long-term Investors"
Working Paper,
September
2010
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Corporate Finance
Abstract
We argue that a fundamental reason for the short-term perspective of corporate executives is the short-term orientation of shareholders themselves and the financial markets that drive the performance benchmarks of CEOs. Although some shareholders are prepared to take a more long-term view they are generally not rewarded for their loyalty to the company. While lengthening stock option vesting periods and introducing claw-back provisions into CEO compensation contracts help induce a more long-term orientation of CEOs, we argue that it is also necessary to reinforce this more long-term performance-based compensation with a better alignment between shareholders and CEOs horizons. One way of moving towards such an alignment is to introduce L-Shares (or L-shares). These shares provide an additional reward to shareholders that have held on to their shares for a contractually specified period of time, the loyalty period. The reward would be in the form of a warrant giving the right to purchase a pre-determined number of new shares at a pre-specified price and granted to loyal investors at the expiration of the loyalty period. This paper discusses how L-shares can be structured and distributed, how they may be valued and how they affect liquidity and control of the corporation.
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