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Symposium 2009

Solution for Balancing Risk Taking and Financial Regulation

The Challenge

Many observers blame excessive risk taking and inadequate regulation as the core causes of the current global financial crisis that we have been witnessing.

Many observers blame excessive risk taking and inadequate regulation as the core causes of the current global financial crisis that we have been witnessing.

Introduce incentives for “patient capital,” giving more voting rights to investors who commit themselves to companies for longer periods.

A focus on short-term results has been a value-destroying practice, triggering excessive risk-taking. This was one of the sources of the financial crisis. Managers, stimulated by analysts and supported by weak corporate governance, have been trapped for years in a mad competition to beat quarterly performance, with little regard for the sustainability of their strategy and to longer and sounder targets. Shareholders’ discipline over financial institutions has been loose and often irrelevant.

The time has come to introduce new incentives to align business strategies with the social costs of risk-taking. For example, introduce incentives for patient capital. Investors that commit themselves to a company for a longer period should be rewarded with some form of stronger voting rights. By doing this, management would be led to balance the short-term pressures of the market with the interests of longer-term shareholders to take only sustainable risks.

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