Taking the long view

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More executives and corporate board members feel pressure to deliver short-term results than they did just a few years ago, and the situation is getting worse. Roughly three-quarters of them are being pushed to demonstrate a boost in performance over a two-year horizon – or less – even though it’s generally known that short term investing destroys value.

How can the trend be reversed?

This overarching question is what guided a dinnertime discussion at an annual roundtable co-hosted by Corporate Knights during the World Economic Forum in Davos, Switzerland. The roundtable was held in partnership with the United Nations backed Principles for Responsible Investment (PRI) and the UN Global Compact.

The 40 guests who attended, including representatives from major corporations, pension funds, sovereign funds and government organizations, were asked to imagine a world where big investors prioritize long term thinking; a marketplace where investment managers are hired and compensated based on their ability to align with long-term objectives.

In such a world, investors would be more inclined to invest in and engage with companies focused on long-term value creation and sustainable operations. Capital would shift to more illiquid asset classes, such as infrastructure and real estate, and company management would no longer be held hostage to quarterly financial- only reporting.

“We know it’s the right thing to do, but that’s not what’s happening as capital flows through the value chain,” said roundtable co-chair Mark Wiseman, president and chief executive of the Canada Pension Plan Investment Board (CPPIB). Somewhere along that value chain – from savers to major asset owners to asset managers to corporations – the long view has been neglected.

Major asset owners such as pension funds, insurance firms, mutual funds and sovereign wealth funds invest on behalf of longterm savers, taxpayers and investors. Their fiduciary responsibilities stretch over generations in many cases, and their combined influence has grown over the decades. Today, for example, they own 73 per cent of the Top 1,000 companies in the U.S. versus 47 per cent in 1973.

“How is it that those asset owners have abdicated their role in demanding that the capital they represent be put to the best longterm value creation?” asked Wiseman.

Fellow co-chair Dominic Barton, global managing director of McKinsey & Company, shared some results from a McKinsey-CPPIB survey of 1,000 executives and board members to illustrate how pervasive “short-termism” has become:

• 63 per cent of respondents said the pressure to demonstrate short-term financial performance had increased over the last five years;

• 79 per cent felt most pressure to demonstrate strong financial performance over two years or less;

• only 7 per cent said they were pressured to deliver strong financial performance over a horizon of five years or more;

• 73 per cent felt they should be using a time horizon of more than three years;

• 86 per cent agreed that having a long-term time horizon would help them make better decisions.

Wiseman said big investors have to start acting more like the owners they are. It starts by clearly defining their long-term objectives and setting up governance structures that align with those objectives. It also requires that they be more active owners – for example, exercising more of their proxy voter rights and demanding that the corporations they hold regularly report on long-term metrics.

Quarterly reports alone don’t tell the whole story, said Corporate Knights vice-chairman Sean Flannery, former chief investment officer for State Street Global Advisors, Americas. “When we look at quarterly numbers, do we really believe they measure all that we need?”

More integrated reporting of financial and non-financial environmental, social and governance information is a necessary step.

At present, roughly 10 per cent of global businesses are taking the idea of integrated reporting seriously. “Clearly there’s still a long way to go,” said Georg Kell, executive director of the UN Global Compact. The field is divided by those who don’t see it worth the effort and those who are driven by the need to be leaders. “If you want to become a leader or stay a leader, you cannot afford to ignore non-financial issues,” said Kell.

UN Global Compact has partnered with the UN PRI to study investor attitudes and how they are changing over time relative to those of chief executive officers. The study, to be published this spring, will be based on interviews of 100 institutional investors from around the world.

Doug Peterson, president and CEO of credit-ratings leader McGraw Hill Financial (which includes Standard & Poor’s), said the emphasis on long-term thinking comes at an important time. Developed countries have crumbling infrastructure, while developing countries are in massive infrastructure expansion mode.

There’s a $200 billion gap each year in infrastructure capital needs, Peterson said, and the gap has grown since the financial crisis. “Governments don’t have the same level of capacity to do financing, and banks are shrinking their balance sheets, so there really is a need for non-traditional infrastructure financing to get involved.

“Filling this gap requires long-term thinking, because it has long-term benefits to society and creates a virtuous cycle,” Peterson explained. Shifting capital this way will also reduce liquidity in portfolios, driving volatility out of the market.

Offering the CEO perspective, Suncor Energy’s Steve Williams and Teck Resources’ Don Lindsay described their jobs as a constant balancing act. Lindsay, for example, talked about the “brutal” pushback he often faces with decisions like investing in land conservation and wastewater treatment for mining operations.

“If (big shareholders) acted like owners they’d fully understand that we must do this,” said Lindsay. “It’s not an option. It’s about who we are, who we are as a community – a broader global community.”

Williams described the different signals he gets from shareholders, which can be far from a homogeneous bunch. “One of the things a CEO has to do is keep all of the balls in the air, because he has to be able to survive in order to pursue the long term.” If you don’t survive you can’t start to influence significant change, yet the average CEO in North America only sits in the job for a few years, he said.

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