Kathy Valentine
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Jessica Galehouse
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Brian Moriarty
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CFA Centre, Business Roundtable Institute for Corporate Ethics Report Calls on CEOs, Asset Managers, Investors, Others to Adopt Practices to Promote Long-Term Value for Shareholders’ Benefit, Break ‘Short-term Obsession’
New York, July 24, 2006 − The CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics today jointly called on corporate leaders, asset managers, investors, and others to break the “short-term obsession” harming shareholders’ interests by reforming practices involving earnings guidance, compensation, and communications to investors.
“The obsession with short-term results by investors, asset management firms, and corporate managers collectively leads to the un-intended consequences of destroying long-term value, which decreases market efficiency, reduces investment returns, and impedes efforts to strengthen corporate governance,” the report said. “Our broad set of recommendations − focused on the issuer, analyst, institutional investor, and asset and hedge fund manager communities − could mitigate the current overemphasis on short-term performance.”
“Short-termism cuts across an enterprise and results in management actions − including reductions in research and development, and the forgoing of strategic investments − all in order to make the quarterly number,” said Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics. “The reforms needed to address short-termism must be multifaceted, involving the many stakeholders who participate in capital markets.”
The report outlines five broad areas of recommendations:
- Reform earnings guidance practices: Companies need to reconsider the benefits and consequences of giving earnings guidance and make adjustments to their involvement in the “earnings guidance game” that best reflect shareowners’ interests.
- Develop long-term incentives across the board: Compensation for corporate executives and asset managers should be structured to achieve long-term strategic and value-creation goals.
- Demonstrate leadership in shifting the focus to long-term value creation.
- Improve communications and transparency: More meaningful, and potentially more frequent, communications about company strategy and long-term value drivers can lessen the financial community’s dependence on earnings guidance.
- Promote broad education of all market participants about the benefits of long-term thinking and the costs of short-term thinking.
Specific recommendations from those five areas include:
- End the practice of providing quarterly earnings guidance;
- Align corporate executive compensation with long-term goals and strategies and with long-term shareowner interests;
- Improve disclosure of asset managers’ incentive metrics, fee structures, and personal ownership of funds they manage; and,
- Endorse the use of corporate long-term investment statements to shareowners that will clearly explain — beyond the requirements that are now an accepted practice — the company’s operating model.
The report’s findings and recommendations are based upon a research review by the CFA Centre and the Business Roundtable and several symposia discussions with key stakeholders, including: corporate issuers, analysts, asset managers, shareowners, institutional investors, hedge fund managers, regulators, and the media.
“The participation of the various stakeholder groups was critical to achieving a set of significant recommendations,” said Kurt Schacht, CFA, managing director of the CFA Centre for Financial Market Integrity. “Getting all of the parties involved at the same table led to meaningful progress. The discussions enabled us to construct what we believe are viable, achievable strategic solutions.”
The full report and an executive summary are available online at www.cfapubs.org/toc/ccb/2006/2006/1.
CFA Centre for Financial Market Integrity
The CFA Centre develops timely, practical solutions to global capital market issues, while advancing investors’ interests by promoting the highest standards of ethics and professionalism within the investment community worldwide. Established by CFA Institute as a distinct division with its own executive director and advisory council, the CFA Centre will build upon the CFA Institute 40-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession, which were first established in the 1960s. More information can be found at www.cfainstitute.org/centre.
Business Roundtable Institute for Corporate Ethics
The Business Roundtable Institute for Corporate Ethics is an independent entity established in partnership with Business Roundtable — an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees and $4.5 trillion in annual revenues — and leading academics from America’s best business schools. The Institute brings together leaders from business and academia to fulfill its mission to renew and enhance the link between ethical behavior and business practice through executive education programs, practitioner-focused research and outreach. More information on the Institute can be found at www.corporate-ethics.org.