Some experts view long-termism as a superior investment strategy, or as a guiding philosophy that makes it easier to do business. For instance, Apple announced last year that it would no longer report quarterly sales numbers for individual business units, as part of an effort to refocus investors on longer time horizons. A 2016 survey by FCLTGlobal and McKinsey found that 23% of CEOs would like their strategic-planning timelines to be five years or greater, when in reality only 11% said they are able to look that far ahead.
Mergermarket on behalf of Toppan Merrill spoke with four experts to explore the most important factors influencing long-termism in the current environment.
Toppan Merrill question: Given the current market structure, do you think it is plausible to imagine a public company system in which investors are more strongly encouraged – or forced – to take a longer-term view? How can investors and regulators balance the need to provide current information with the desire to encourage long-term thinking? Leading industry experts weigh in...
Sarah Williamson, FCLTGlobal says: We already see many investors prioritizing the long-term future growth of a company over quarter-to-quarter results. For example, quarterly earnings per share guidance is a critical channel through which short-termism impacts companies, investors, and capital markets. But it’s not desired by the majority of the investor community – our studies have found that fewer than 7% of investors want companies to offer guidance for periods of less than one year, and only 27% of companies offer it. It’s a perfect example of a practice that emphasizes trading over ownership through a myopic focus on quarter-to-quarter profits.
By contrast, companies can reinforce their long-term narrative by presenting investors with plans that include capital allocation priorities, key performance indicators, and 3-5-year objectives. Such plans, or what we’ve come to call “long-term roadmaps,” can paint a clearer picture of a company’s trajectory. Framing this vision with trackable metrics gives investors the assurances and corporate accountability they need to focus on the long term.
Neither of these practices is required by any regulatory body, and the SEC has recently brought the issue under review, exploring how a quarterly focus can damage value creation. Corporate communications are essential to maintaining transparency and long-term investors’ confidence in a company’s strategy. Regulators could support this ongoing behavioral shift by encouraging the use of long-term roadmaps in lieu of quarterly guidance in order to strike that perfect balance. This sort of prompt would put the investment community on the path toward a longer-term view.
Timothy Coffin, Breckinridge Capital Advisors adds: I don't think it's necessary for anyone to force long-termism – I think it's already happening because prudent investors are focused on the medium to long term. Those investors are trying to avoid dormant liabilities or latent risks that come from externalized costs, by paying closer attention to the factors that impact them. Certainly, companies are paying attention to these issues, and what I think is important is for investors to ask management to report on them, making the information transparent and available. Ultimately, as investors, we embrace as much transparency as we can get, but I don't think long- termism needs to be forced from a regulatory standpoint. The marketplace will reward those that do.
Andy Green, Center for American Progress weighs in: I would say that corporate disclosure on ESG issues can become a lot more meaningful when paired with smart, strong regulation. For instance, worker training disclosure and human capital management disclosure packs a bigger punch when paired with public investments in workforce systems, increasing minimum wages, and full- employment policies that make it more incumbent upon companies to scrutinize how they're treating their workforce.