New Institutions Push Long-Term Thinking

A new movement is pushing back against short-term investment and narrow focus on quarterly earnings.

Criticism of market short-termism and shareholder activism are on the rise, and several new initiatives aim to change short-term thinking. According to a report by McKinsey Global Institute, between 2011 and 2014, the market capitalization of companies with a long-term perspective grew $7 billion more than that of other companies, and their total return to shareholders was higher. Revenue of the long-term companies cumulatively grew on average 47% more than the revenue of others. The report also confirmed that long-term companies create more jobs and add more to GDP growth.

One of the leading initiatives in this field, Focusing Capital on the Long Term, or FCLT Global, was founded in 2016 as a not-for-profit organization to develop practical tools that encourage long-term behavior in business and investment. The group’s founding members–BlackRock, the Canada Pension Plan Investment Board, Dow Chemical, McKinsey and Tata Sons, to name a few–show the breadth of interest. Such initiatives aim to educate the market and introduce policy proposals that emphasize long-term investing and its connection to sustainable economic growth and savings.

Bill Anderson, a senior managing director at Evercore, notes the decline in IPOs and says that “entrepreneurs are observing how public companies–including many successful businesses–focus on quarterly earnings, face pressure to value share repurchase over capital investment and face aggressive activists.”

One of the main areas of reform is corporate governance. The New Paradigm, a project of the World Economic Forum’s International Business Council, builds a road map for an implicit corporate governance partnership between corporations and investors to achieve sustainable long-term growth. The project’s leaders call on board directors to avoid any form of compensation that could be viewed as inconsistent with long-term strategy and to ask investors to actively vote shares, not abdicate decision-making to proxy advisory firms.

“To be effective, these initiatives to support long-termism will require changes in investor behavior and disclosure, and mutual funds will need to demonstrate their support for corporate boards–perhaps publicly–when pressure to pursue short-term actions occurs, rather than waiting until they vote at the annual meetings,” Anderson says.