Looking Beyond the Short Term

This is the first in a series of blog posts relating to the launch of the S&P Long-Term Value Creation (LTVC) Global Index.

The debate continues on the detrimental impact of the short-term mindset of public companies.  Short-termism (a.k.a. quarterly capitalism) is defined as companies’ fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the cost of long-term investment.  Short-termism is a problem because it has the potential to undermine future economic growth.  The lack of long-term investment will ultimately lead to slowing GDP, higher unemployment levels, and lower future investment returns for savers—all combined, these effects hurt everyone.  There’s a consensus that the main source of the problem is the tremendous pressure that public companies face from financial markets to maximize short-term results time and time again.  Back in 2013, McKinsey and the Canada Pension Plan Investment Board (CPPIB) conducted a McKinsey Quarterly global survey of more than 1,000 board members and C-suite executives to gauge their long-term approach in managing their companies.

  • 63% of respondents said the pressure to generate strong short-term results had increased over the previous five years.
  • 79% felt pressured to demonstrate strong financial performance over a period of just two years or less.
  • 44% said they use a time horizon of less than three years in setting strategy.
  • 73% said they should use a time horizon of more than three years.
  • 86% declared that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation.
  • 46% said that the pressure to deliver strong short-term financial performance stemmed from their boards; while the board members expressed that they were just channeling the short-term pressures felt from institutional investors.

The results were startling and bring to light how deeply the short-term mindset has permeated corporate culture.  However, the good news is that a coalition of institutional investors is realizing that telling company management to focus on the long term, and thereby placing the entire onus on them, is both unrealistic and ineffectual.  They feel that the only way to shift the mindset to long-term value creation is by calling upon other asset owners who control the assets that companies need to change their current approach.  Asset owners are the key constituents to effect real change and their buy-in to long-term thinking will facilitate the process for other players such as asset managers, corporate boards, and company executives to move away from short-termism.

Our next blog will discuss how CPPIB and S&P Dow Jones Indices worked together to design an index that seeks to address the short-termism undermining global economies.

 

The posts on this blog are opinions, not advice. Please read our disclaimers.

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