Industrial Foundations as Long-Term Owners

Concerns about short-termism have been mounting in recent years and have influenced the EU shareholder directive, the US presidential debate, and the French Florange Act. Larry Fink, CEO of Blackrock, the largest investor in the world, is worried. Scholars, politicians, and executives argue that companies pursue short-run profitability at the expense of long-run investments and sustainability. The perceived trends are blamed on corporate governance related issues like short-term managerial incentives, quarterly reports, share analysts, takeover threats, managerial turnover, or speculative stock market fluctuations. Several remedies have been suggested including so-called loyalty shares, abolishing quarterly reports and earnings guidance, bonus caps (the EU Capital Requirements Directive), or limiting hostile takeovers. 

In this paper, we focus on the pivotal role of long-term ownership as a remedy to short-termism. Previous research has pointed to long time horizons in family businesses and short time horizons in companies owned by transient financial investors. We argue that committed long-term shareholders have the power and the incentives to take into account the long-run effects of their behaviour, including their choice of governance structures, because they are more likely to be around to face the consequences of their decisions. Thus, if we can fix ownership structure, we may be able to fix some of the problems of short-termism. 

We propose that a credible long-term ownership commitment enables companies to avoid the performance loss due to short-termism and to engage in mutually beneficial implicit contracts with stakeholders. Companies and their stakeholders may benefit from a commitment not to breach such implicit contracts, even when doing so would maximize profits ex post. For example, employees are more likely to be loyal if they trust that they will be rewarded by stable employment, even if the company could increase its immediate profitability by laying-off employees.

We test these ideas on corporate ownership by “industrial foundations”, which are independent non-profit institutions, whose most important goal is the preservation of a business company. Our research question is whether foundation ownership leads to long-term corporate governance of foundation-owned companies. We argue that industrial foundations are, by design, long-term owners, even compared to family ownership, because their charters oblige them to long-run ownership and company survival. Thus, they provide an ideal setting in which to study the impact of long-term ownership.

We use a unique Danish data set to test whether foundation ownership is associated with long-term governance using indicators like ownership and management stability, capital structure, and investments, employment, and corporate survival. Foundation ownership is observed around the world in companies like Bosch (Germany), Bertelsmann (Germany), Hershey (US), Tata (India), or Rolex (Switzerland), but it is most common in Northern Europe and particularly in Denmark, which makes it feasible to do statistical studies on Danish data.

We show that industrial foundations are, in fact, highly stable owners compared to other owner types. Moreover, as expected, long-term governance characterizes foundation-owned companies, including stable management, low financial leverage, long-run investments, and higher survival rates. Overall, we find that foundation-owned companies are more long-term than firms with other ownership structures.

Our paper contributes to current corporate governance discussion by identifying the important role of ownership commitment in promoting long-term corporate governance. We propose that long-term ownership commitment may also contribute to longtermism in other ownership structures like family businesses, financial mutuals, or state-owned enterprises.

We show that industrial foundations are, in fact, highly stable owners compared to other owner types. Moreover, as expected, foundation-owned companies are characterized by long-term governance, including stable management, low financial leverage, long-run investments, and higher survival rates. Overall, we find that foundation-owned companies are more long-term than firms with other ownership structures.

Our paper contributes to current corporate governance discussion by identifying the important role of ownership commitment in promoting long-term corporate governance. We propose that long-term ownership commitment may also contribute to longtermism in other ownership structures like family businesses, financial mutuals or state-owned enterprises.