Position Paper September 2020
Improvements made and challenges in investing for the long-term
In 2020 CFA Institute convened a panel revisiting the topic of short-termism and commissioned Fund Governance Analytics to quantitatively analyze the issue as we found many companies reluctant to step away from the short-term earnings guidance game.
Short Termism RevisitedRead the full paper
Issuers and investors have begun to understand the importance of issuer–investor communications in getting both sides on the same page on many long-term strategic issues. In the years since our 2006 report was published, investors and issuers have increasingly invested in resources dedicated to fostering engagement. Both parties realize that building a trusting relationship can increase understanding and avoid the adversarial relationships that often existed between the two groups in the past.
These improvements in the short-termism and long-termism landscape should indeed be celebrated, but more work remains to be done. Many companies have traded in short-term earnings guidance for either long-term guidance or a more diverse set of metrics that better informs investors.
Panel Makes Four New Recommendations for Market Participants:
- Issuers and investors should focus their engagement on long-term strategy and agreed-upon metrics that drive that strategic success as substitution for stepping away from earnings guidance.
- Issuers and investors should work to simplify executive compensation plans so that incentives better align with those of shareowners and are more easily understood.
- Issuers and investors should both make meaningful investments in engagement to foster increased discussion around the long-term issues most important to a company’s strategy.
- Issuers and investors should establish better standards around ESG data so that the data are consistent, comparable, and audited as well as material.
Long-term planning cannot take place until short-term survival is ensured. Investors prefer companies managing and investing for the long term, but they have to understand that companies need to strike a balance between short-term operations and long-term planning. In some instances — such as most of 2020 — the short term can and should take precedence.
We hope this report will help investors better ascertain the current landscape in the short-termism debate and appreciate how far we have come since 2006. We are confident that if we revisit this topic in another 15 years, the market landscape and nature of short-termism will have changed once more. It is therefore imperative that investors and issuers continue their engagement, while always seeking a harmonious balance between the short term and long term as the goal.
The $1.7 trillion prize: What we can gain from addressing short-termism?
In addition to revisiting the issue of short-termism from the perspective of issuers, investors, and other stakeholders, CFA Institute partnered with the firm Fund Governance Analytics to take a more academic approach to the issue of short-termism. We took a quantitative look at the data concerning the issue of short-termism between 1996 and 2018 to see whether any short-term behaviors were evident that investors and issuers should better understand.
We found that companies that failed to invest in research and development (R&D); selling, general, and administrative (SG&A) expenses; and capital expenditure (CapEx) tended to underperform in the midterm (three to five years). Investors notice when companies cut back on their long-term investment and tend to prefer companies that they see are investing for the long term.
A company may forgo long-term investment at times for legitimate reasons, such as merger and acquisition opportunities or stock buyback programs that may be the best use of investor funds at the time. The study summarized in this report estimated the agency costs (foregone earnings) of short-termism at $1.7 trillion over the 22-year period covered by our analysis, or about $79.1 billion annually.
Short-termism expresses itself in many different ways, from quarterly earnings guidance practices, short-term incentive structures, and a favoring of short-term investment over long-term planning. The use of quarterly earnings guidance has decreased dramatically since we first wrote on the topic in 2006, and executive compensation practices generally have tilted more toward the longer term in that time period. Engagement between investors and issuers has greatly improved communication in the past decade as conversations about ESG issues has increased.
About the Author(s)
Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.
Mr. Allen holds an MA in journalism and mass communications from the University of Wisconsin-Madison and a BBA in finance from the University of Texas at Austin.
Awarded CFA designation, 1987
Mr. Allen is head of Americas capital markets policy for CFA Institute, where he manages the Capital Markets Policy Group in the Americas. This group develops and promotes capital markets positions, policies, and standards for CFA Institute. Mr. Allen also coordinates and supports related educational and public awareness activities.
Mr. Allen has worked as staff liaison to the CFA Institute Capital Markets Policy Council since its founding in 2005. The Council helps CFA Institute develop global perspectives on market-related issues. From 2002 to 2004 he worked with the former European Advocacy Committee, responding to policy initiatives of the European Commission and regulatory proposals of financial markets regulators in France, Germany, Switzerland, and the United Kingdom. He was rapporteur for the Global Corporate Governance Task Force in 2004 and 2005 and helped author The Corporate Governance of Listed Companies: A Manual for Investors. He also worked with these former advocacy committees: Municipal Securities Subcommittee of the United States Advocacy Committee; the Financial Accounting Policy Committee; the Financial Reporting Subcommittee of the Canadian Advocacy Committee; and the Task Force on Disclosures for Asset-Backed Securities.
Mr. Allen was a vice president in the corporate finance department of First Southwest Company, a Texas-based investment banking institution, where he specialized in the analysis and valuation of privately held companies and the analysis of industrial revenue bond offerings. He also has worked as an independent research analyst on projects covering the global payments and settlement businesses and the small business banking efforts of financial institutions in the United States and Europe. He covered the derivatives and asset-backed securities markets as a staff reporter for the American Banker, and managed the editorial aspect of four publications for SNL Financial. As a freelance journalist, his work was published in such magazines as Global Finance, Bank Director, Corporate Board Member, and Banking Strategies.
Kurt Schacht, JD, CFA, is managing director for policy and regulatory relations at CFA Institute. He oversees global advocacy efforts including regulatory consultations, policy research, standard setter engagement and serves on a range of stakeholder advisory groups engaged on investment management policy issues. His work is focused on advancing investor protection, financial market transparency and fairness, financial reporting and audit policy and industry professionalism. He is former Chairman of the Investor Advisory Committee to the U.S. Securities and Exchange Commission (SEC) and is currently serving a three-year term as a member of the Board of Trustees for the IFRS Foundation which oversees the IASB. He served as a member of the European Commission's Expert Group on Corporate Bond Market Liquidity based in Brussels in 2017. He is a member of the: Harvard Corporate Governance Forum Advisory Council; Board of Trustees - for the Greenwich Roundtable; Advisory Board - Columbia Law Millstein Center for Global Markets. He served two terms on the Public Company Accounting Oversight Board's standing advisory group. Previously, Schacht served as chief operating and legal officer for a retail mutual complex; general counsel and COO for a Manhattan-based hedge fund; and chief legal officer for the State of Wisconsin Investment Board in Madison, Wisconsin. Schacht holds a BS degree and a JD degree from the University of Wisconsin. He was awarded the CFA charter in 1998.