Rising to the challenge of short-termism is a recent report issued by FCLT Global
FCLT Global (Focusing Capital on the Long-Term), with a membership of asset owners and managers and corporations, is “dedicated to developing practical tools and approaches that encourage long-term behaviors in business and investment decision-making”. The introduction to the latest report sums up its contents succinctly:
- “Discussions of corporate short-termism are often a microcosm of the issue itself. On the short view—say, 2009 to the present—things are looking up. CEO tenures, the average holding period for S&P 500 shares, and the average duration of corporate bonds are all up. If one takes a longer view, however, the picture begins to darken. By some measures, U.S. business investment in fixed assets is at an all-time low, while the share of net income S&P 500 companies spend on buybacks is at an all-time high of 58%, nearly 30 times its share in 1981.
- Advocacy against short-termism is not new—a slew of articles over the past 5 years in publications from the Financial Times to the Harvard Business Review have established the contours and scale of this problem. In 2013, BlackRock, the Canada Pension Plan Investment Board (CPPIB) and McKinsey & Company came together to create the Focusing Capital on the Long Term initiative with the aim of conducting research on long-termism and developing practical tools and solutions…
- Unfortunately, according to corporate executives themselves, the pressure on companies to generate short-term financial performance shows no sign of letting up. In fact, the latest results from a McKinsey Quarterly survey panel of over a thousand C-level executives and board directors show that a majority of respondents perceive that short-term pressure is growing. Compared with survey results from 2013, even more of them report feeling most pressured to produce results in two years or less. The balance between short-term accountability and long-term value creation has fallen out of balance; it is time to reconsider what can be done to restore the long-term to its proper place in corporate planning and strategy.
- The problem of corporate short-termism is a complex one. Its causes are multifaceted, ranging from activist investor pressure to the way management teams are incentivized and compensated. However, the answers executives and board members give when asked directly about short-termism offer an opportunity to get to the heart of the matter. What emerges from these responses is a keen understanding that short-termism manifests through a negative feedback loop: while executives may feel that investor pressure forces their hand, the short-term objectives and metrics they set also push investors to shorten their horizons to match the data available to them. Indeed, when executives and directors are asked where they feel short-term pressure on them comes from, nearly 40% point to executive teams and boards of directors themselves! These business leaders know that they are affected by short-termism and freely admit that they would prefer to use longer strategic planning horizons. The problem is how to enable them to break the vicious cycle.”
FCLT’s very existence is largely based on the premise that “Truly untangling these forces requires a long-term coalition to promote long-term choices and orientation at the industry and economy-wide levels, not just the company level.” But others fail to detect such short-termism at work, problematically or otherwise. Citing a couple of experts, Terence Corcoran wrote in the National Post last year: “There is no evidence that short-termism is rampant and/or that it is undermining corporate or economic performance.” Even if it did exist, he argued, it would only reflect the reality of the pace now of technological and other change, for instance: “It took 71 years for half the U.S. population to get a telephone, 14 for a cellphone and 10 years for Internet access.” Corcoran was writing before the ascent of Trump, which seems to have set numerous corporations scrambling, and in general seems like the ultimate assertion of our collective inability to foresee what’s around the next corner. But of course there’s no inherent contradiction between a strategy that focuses predominantly on the long term while being alert and responsive to developments that may undermine the assumptions underlying that strategy.
The arguments for or against short-termism are to some extent moral and ideological rather than economic. To illustrate this, consider whether a $1 million bequest to a food bank would be best spent to feed hungry people in the short term, or rather invested at a conservative rate of return, with the resulting income going to feed such people into near-perpetuity. The latter might appear more rational from some perspectives, but can one appropriately say to people starving right now that available resources are being actively denied them, their current suffering counting for less than that of theoretical future individuals? Likewise, if companies focus primarily on exploiting their current strengths and on generating and delivering some short-term wealth, you might conclude that’s better than setting out to compete against others for the same overpriced pool of long-term opportunities (recall that the great majority of corporate mergers and takeovers fall short of expectations) or to (say) pursuing development projects that may just not pan out. The average life of S&P 500 corporations has been reported as 18 years – should we just roll with that reality then?
Whatever the right answer, all of this provides just one of many reasons why IFRS financial statements can seem so abstract. We all know the concept of materiality as a measure of whether particular items could influence the economic decisions that users make on the basis of the statements. IAS 1 emphasizes that this includes “consideration of the characteristics of those users.” But it doesn’t mean to imply by this, for example, that if all the users of a particular company’s statements were shown to be aggressively focused on the short-term, then much of the longer-term aspects of the statements could be assessed as immaterial. And yet, we may have to acknowledge at some point that the perspectives of short- and long-term investors are so fundamentally different that it hardly makes sense to claim to address them in the same summarized communication…
The opinions expressed are solely those of the author