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Business leaders eye steps toward long-termism

Mar 07, 2018
Group of investors and CEOs agrees to explore practical ways to shift to long-term value creation

More than 150 corporate, investment and regulatory leaders last week issued a call to action intended to help the markets take a less short-term perspective.

The gathering in New York, which included BlackRock CEO Larry Fink, Unilever CEO Paul Polman, McKinsey & Co CEO Dominic Barton and SEC chair Jay Clayton, featured discussions on how investors and issuers can work together to protect long-term shareholder value creation.

With this in mind, the group issued four practical action points designed to recalibrate public markets toward a longer-term focus. They are:

·                Long-term oriented metrics

·                More transparency in capital allocation decisions

·                Weighing long-term risks against clients’ and companies’ objectives

·                Potential incentives for long-term shareholders.

‘This is a call to action that we can drive change,’ Sarah Williamson, CEO of FCLTGlobal – which organized last week’s event – tells IR Magazine. FCLTGlobal will now explore how to provide practical tips to its members around these four findings, Williamson adds.

This was the first formal summit hosted by FCLTGlobal, a non-profit founded in 2016 with the aim of moving away from short-termism. The group’s founding organizations include BlackRock, the Canada Pension Plan Investment Board, the Dow Chemical Company, McKinsey & Co and Tata Sons. Since the launch of FCLTGlobal, 42 organizations have joined.

‘FCLTGlobal’s founding mission is to motivate business leaders to actively combat short-termism in our markets from within their own spheres of influence,’ says Mark Wiseman, FCLTGlobal board chair and global head of active equities and chair of alternative investors at BlackRock, in a statement. ‘Widespread adoption of long-term strategies will come only when we lead by example.’

Long-term oriented metrics

FCLTGlobal is an advocate for issuers getting rid of quarterly guidance, with research co-authored with McKinsey & Co suggesting that 55 percent of CFOs would prioritize hitting quarterly guidance targets ahead of pursuing a minimum viable product opportunity that may have long-term benefits.

‘What got a lot of traction was moving away from quarterly guidance and instead focusing on a long-term strategic road map that really looks at KPIs or the leading indicators of performance,’ Williamson says.

For investors, it was suggested that, at the least, a simple change to investment reporting could shift behavior toward a longer-term outlook. ‘We had some discussion about why, when investment reports show performance versus the benchmark, they start with the quarterly performance, then annual, then three-year, and so on,’ says Williamson. ‘That anchors the mind on the short-term number and by the time you get to the long-term numbers, your mind is focused on the short term.

More transparency in capital allocation decisions

Williamson says there was lively debate at the meeting about whether companies should return cash to shareholders and let investors make capital allocation decisions, or allocate capital to activities that may create long-term value, such as M&A, R&D or staff training.

‘Investors try to understand the capital allocation decisions a company has made in the past and whether they’ve been fruitful or not,’ Williamson says. ‘That colors the decision about capital allocation in the future; if there is a misunderstanding, there tends to be a shortening of the time frame. If companies have made good investment decisions, their investors are likely to give them a longer leash.’

Questions were asked about how investors can do a better job of articulating their preferences, which FCLTGlobal intends to explore.

Weighing long-term risks against clients’ and companies’ objectives

Another recent gathering of business leaders in New York City – the UN Investor Summit – underscored how a range of ESG issues, such as sustainability and climate change, are now being looked at as potential business risks or opportunities.

At the FCLTGlobal event, there was an acknowledgement that issuers have to plan for these eventualities to satisfy long-term-oriented investors but can’t leave themselves exposed to the threat of activist investors with a short-term focus. For instance, recent research from ISS suggests the boards of companies targeted by activist investors become less diverse following the activist campaign, even if the campaign isn’t successful.

‘One of our members talked about it like driving a car,’ Williamson says. ‘If you only look a long way down the road without looking at your gas gauge and speedometer, something will go wrong. And if you only look at those things and not at the road ahead, something will go wrong.’

This topic underscored the importance for companies of knowing their major long-term shareholders, engaging with them regularly and ensuring their vision for long-term value creation is aligned.

Potential incentives for long-term shareholders

‘Somebody made the comment that you get the shareholders you deserve,’ Williamson says. ‘So how do you work to make sure your shareholders are long-term oriented?’

Beyond shareholder engagement, Williamson says attendees discussed various incentives for long-term shareholders that are already used in Europe – such as loyalty dividends. But she also acknowledged that, being a global organization, not all of the topics suggested would work for everyone in attendance.

‘We have members from many different countries and we understand this isn’t a one-size-fits-all [scenario],’ she says. ‘We’re trying to say these tools are available and they may work.’

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