Investors Beginning to Prefer Companies that Pursue Long-Termism

Interest in CSR and corporate sustainability among institutional investors has logically been accompanied by a sharper focus on whether and how companies are adopting the long-term perspective necessary for committing resources to projects that will likely have the highest value to the business at some point beyond the traditional short-term performance window.  A study published in 2017 by the McKinsey Global Institute claimed to provide systematic evidence that companies that adopted a “long-term approach” outperformed companies that emphasized the short-term strategies typically associated with maximizing shareholder value on a range of key economic and financial metrics including revenue and earnings, investment, market capitalization, and job creation.[1]

Institutional investors have identified long-term corporate strategy and aligning compensation and management incentive to promote long-termism as key topics for engagement with their portfolio companies.  For example, over 100 companies from around the world have signed on to the “Compact for Responsive and Responsible Leadership A Roadmap for Sustainable Long-Term Growth and Opportunity”, which has been sponsored by the International Business Council of the World Economic Forum as a means for corporations, their chief executive officers and boards of directors, as well as leading investors and asset managers to create a corporate governance framework with a focus on the long-term sustainability of corporations and the long-term goals of society.  The Compact calls on companies to commit to[2]:

  • Ensuring the board oversees the definition and implementation of corporate strategies that pursue sustainable long-term value creation.
  • Encouraging periodic review of corporate governance, long-term objectives and strategies at the board level as well as clear communication between corporations, investors and other stakeholders about the outcomes.
  • Promoting meaningful engagement between the board, investors and other stakeholders that builds mutual trust and effective stewardship, and promotes the highest possible standards of corporate conduct.
  • Publicly supporting the adoption of the Compact and implement policies and practices within my organization that drive transformation towards the adherence to long-term strategies and sustainable growth for the benefit of all stakeholders.

Similarly, the corporate governance principles for US listed companies endorsed by the Investor Stewardship Group include guidance that boards should develop management incentive structures that are aligned with the long-term strategy of the company.[3]

One interesting approach to instilling long-termism into mainstream corporate governance is the call for the creation of a “Long-Term Stock Exchange” which would supplement existing requirements imposed by the Securities and Exchange Commission and other exchange regulators with additional conditions such as tenured shareholder voting power (i.e., permitting shareholder voting to be proportionately weighted by the length of time the shares have been held), mandated ties between executive pay and long-term business performance and disclosure requirements informing companies who their long-term shareholders are and informing investors of what companies’ long-term investments are.[4]

While sentiment for encouraging long-termism and promoting a broader range of stakeholder interests has been around in some form for decades, the attacks on the primacy of shareholder value creation have never been as strident and are likely to accelerate in the future and become a permanent fixture among governance issues.  Politicians in more than 30 states and the District of Columbia have formalized the constituency theory by adopting statutes that permit the formation of “benefit corporations”, a new form of for-profit corporation that explicitly expands the fiduciary duties of directors beyond maximizing shareholder value, which is still one of the primary goals of a corporation, to include consideration of whether or not the corporation’s activities have an overall positive impact on society, their workers, the communities in which they operate and the environment.  While the rate of adoption of benefit corporation status has been slow, particularly among public companies, the recognition of benefit corporations has contributed to sharpened focus on the separate interests of non-shareholder stakeholders and created a host of new issues and challenges for directors of all types of corporations such as ­­how to measure and compare non-financial performance aspects of corporate activities; how to hold corporations accountable to stakeholders who do not have the rights to vote that are held by shareholders; and how to structure incentive packages for executives and managers tied to complex multi-stakeholder goals and commitments.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] Discussion Paper: Measuring the Economic Impact of Short-Termism (McKinsey Global Institute, February 2017), available at file:///C:/Users/Alan/Downloads/MGI-Measuring-the-economic-impact-of-short-termism.pdf

[2]http://www3.weforum.org/docs/Media/AM17/The_Compact_for_Responsive_and_Responsible_Leadership_09.01.2017.pdf

[3] https://www.isgframework.org/corporate-governance-principles/

[4] M. Lipton, S. Rosenblum, K. Cain, S. Niles, V. Chanani and K. Iannone, “Some Thoughts for Boards of Directors in 2018” (Wachtell, Lipton, Rosen & Katz, November 30, 2017), 7, accessible at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.25823.17.pdf.

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