This post originally appeared on Newswire.ca
Many institutional investors have finally woken up to the dangers of ‘short-termism’ and are actively urging companies to focus their attention on long-term value creation.
This spring, the Canada Pension Plan Investment Board (CPPIB) took the lead among a group of six institutions that have set aside $2 billion for investment in companies belonging to an index of companies taking a longer-term approach. The newly-created S&P Long-Term Value Creation (LTVC) Global Index currently includes over 240 companies that meet specific criteria for return on investment and governance.
A development like this couldn’t have happened at a better time. As a sign of just how pervasive short-termism has become, a 2015 study ‘The Economic Implications of Corporate Financial Reporting’ by John Graham, Campbell Harvey, and Shiva Rajgopal, found that nearly 80 percent of CFOs surveyed said that they would sacrifice economic value for their companies to achieve that quarter’s earnings expectations.
Sylvia Groves, president and creative director of the Governance Studio in Calgary, confirmed that “short-termism is pervasive.”
Groves has perceived a growing disconnect between the professed values of individuals within the same institutional investment firms. Often, she said, financial analysts “find it a problem if you’re a penny off earnings,” while the governance teams at these same institutions profess a sincere desire to invest for the long term.
An IROs Perspective
Competing goals are a pervasive problem within companies too. Greg Waller, vice president, investor relations and strategic analysis, at Teck Resources has observed “a fundamental disconnect between our business, where we make decisions with a ten and 20 year time frame, and investors who believe they’re thinking long term when they’re thinking one to two years.”
For a company like Teck, a Vancouver-based metals and mining company that’s profoundly affected by commodity prices, managing short-termism can be a struggle. “We run our businesses as well as we can, manage costs, and invest in the future—but those investments for the future have ten or 20 or 50-year time horizons,” said Waller.
In the current downturn, Waller said that he is witnessing more short-termism than in the past. “Right now it’s almost as if people ignore the long-term value of the assets, and it’s all about multiples and earnings and cashflow, which can drive volatility in our sector. And we’ve seen volatility increase tremendously in the last five years.”
Waller is convinced that consistent communication is the best hope for combatting short-termism. He views the investor day as an opportunity to let the financial community take “a deeper dive into the business.”
Additionally, Waller pointed out that IROs can be guilty of their own brand of short-termism in a market downturn by shying away from traditional outreach. “Too many companies fall into that short-term thinking trap of saying, ‘Oh, well, there’s no point in going out and talking to investors during these difficult times. I’ll wait and save our horsepower for when times are better,”’ he said.
“We don’t agree with that approach,” Waller concluded. “Investor engagement really has to be done with a longer-term timeframe.”