The Global Compact and the Principles for Responsible Investment are looking to gather examples of where companies have tried to mitigate the negative impacts of investor short-termism
Short-termism within companies can manifest itself in a variety of ways, including lower expenditures on research and development, an excessive focus on acquisitions rather than organic growth, underinvestment in long-term projects, and the adoption of executive remuneration structures that reward short rather than long-term performance.
These, in turn, have clear spill-over effects on the manner in which companies address social and environmental issues in their business practices.
For example, they may result in companies paying insufficient attention to sustainability-related issues in their corporate strategy and capital investment decisions, spending less on sustainability-related research and development, and underinvesting in areas (eg on operational efficiency, on risk reduction, on sustainable products which could open new markets or increase their customer base) that could provide longer-term benefits to the company.
Investors’ fixation on short-term financial performance – in investment decision-making and in their dialogue with companies – is widely cited as a key driver of corporate short-termism.
While investors, clearly, play an important role, this framing of the issue creates the misleading impression that companies have no choice but to accept and respond to the pressures and views expressed by their investors.
There is, however, a growing sense that companies can, and indeed should, seek to shape the relationship they have with their investors, and strengthen the emphasis placed on sustainability and long-term value creation.
To do this, companies should:
- Explicitly account for sustainability-related issues in their strategy and capital expenditure investment decisions.
- Communicate this strategy proactively and confidently to current and potential investors.
- Present a clear business case for sustainability-related investments and activities, demonstrating how these investments create value for the business over the short and the long-term.
- Move away from quarterly earnings reporting.
- Align executive remuneration with long-term performance divers (including sustainability-related value drivers).
- Play a constructive role in public policy debates on short-termism.
There is evidence that a strong focus on sustainability and long-term value drivers in company strategy and communications increases mutual trust between companies and their investors, and can enable shareholders to better understand the business.
One of the most interesting pieces of research in this area is a recent paper by Brochet et al, which suggested that companies that focus their communications on the long-term strategy of the organisation, can attract investors with similar horizons. This research also found that companies that focus more on the short–term in their strategies and communications tend to have a more short-term oriented investor base, and tend to have higher stock price volatility.
Unfortunately, however, there is limited hard evidence on whether and how these sorts of actions actually affect the relationship between companies and their investors. While many companies have already implemented several of these suggestions and provide detailed accounts of the actions that they have taken, relatively few have joined the dots and explained how these have affected their relationship with their investors.
The consequence is that many important questions remain unanswered. For example, is it necessary to implement all of the measures above? Are some measures more important than others? What are the downsides of these sorts of action (eg does a move away from quarterly reporting lead to more rather than less volatile share prices)?
And, perhaps most importantly, do these actions enable companies to take a longer-term view in their strategy and capital allocation decisions?
Taking the long view
Addressing these questions is a key focus for the Global Compact LEAD “realising long-term value for companies and investors” project group. This group is working with the Principles for Responsible Investment (PRI) to enhance the dialogue between companies and investors on the materiality of corporate sustainability.
One element of this work is to explore the actions that companies might take to help overcome, or at least mitigate, the negative impacts of short-termism in capital markets. To that end, we welcome feedback from companies and investors on the themes and issues raised here.
We are particularly interested in case-studies where companies can discuss both the actions they have taken and the impact that they think that these actions have had on their investors and/or on the dialogue that they have had with their investors.
If you would like to contribute examples, case-studies or comments, please email Danielle Chesebrough.
Danielle Chesebrough is manager of investor engagements with the UN Global Compact. Dr Rory Sullivan is an independent consultant on responsible investment and a member of the Ethical Corporation editorial advisory board.Global Compact Responsible companies responsible investment
May 2014, London, UK
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