Time to Deal With 'Short-Termism,' According to New Study from The Conference Board

Press Release / News

Apr. 3, 2006

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Now, more than ever, there are indications that corporations and investors can work together to actively address the issue of stock market "short-termism," The Conference Board reports in its latest report, Revisiting Stock Market Short-Termism.

Corporations and Investors Meet To Achieve Consensus

"This report represents a unique consensus achieved by leaders of major corporations and the investment community convened by The Conference Board to a high-level Corporate/Investor Summit held in London in July 2005," says Dr. Carolyn Kay Brancato, Director of The Conference Board Global Corporate Governance Research Center and moderator of the summit (see the end of this press release for the names of summit delegates).

Quarterly Short-Termism Takes the Focus Away from Long-Term Corporate Growth

The study notes that short-termism has many negative effects including focusing investor and corporate attention on near-term quarterly earnings to the possible detriment of longer-term corporate growth. The pressure to meet short-term quarterly earnings numbers can cause undue market volatility. This may, in turn, cause management to lose sight of its strategic business model which would compromise its global competitiveness as well as its ability to make investments in such critical long-term focused areas as research and development and environmental controls.

Links in a Chain - Must Be Tackled All at Once - Not Individually

"Recently, economic distortions generated by short-termism have been accentuated by speculative factors and, in certain cases, less than desirable business ethics practices," says Dr. Matteo Tonello, Senior Research Associate at The Conference Board Global Corporate Governance Research Center and the author of the report. "Our London Summit's corporate and investor delegates agreed that 'short-termism' is a chain composed of three major links: the corporate link, the investor link, and the financial analyst link. Most importantly, delegates to the Summit agreed that it is time for a concerted effort among all of these market participants to tackle the issue."

Why Now?

Dr. Brancato notes: "We have been looking at the issue of how to get companies and investors to focus on long-term growth for more than 10 years at The Conference Board. Now, several important, new developments make change more possible at the current time than at any time in the past."

Among the key factors compelling change:

Both the business and investor communities, now more than ever, recognize the need to restore investors' confidence and the credibility of the international capital markets, which have been undermined by the recent wave of corporate scandals.
Institutional investors, including large public and private pension funds and certain asset managers, have been taking unprecedented steps to monitor the management of their portfolio companies. They have done so by advocating accountability, the enforcement of shareholders' rights, and the adoption of higher standards of business integrity, as well as by investigating the possibility of directing assets toward investments with a greater long-term focus.
Institutional investors are now, more than ever, revisiting the "pay-for-performance" issue, and encouraging companies to devise compensation schemes based on a more balanced combination of financial and extra-financial indicators of performance.
There has been an unparalleled process of international convergence of accounting principles, especially with regard to initiatives to design a new model of corporate reporting based on true value drivers and inclusive of extra-financial measures of performance (i.e. data on customer satisfaction and registered patents, indicators of employees' professional development, and other intangible assets used by businesses to pursue their strategic goals).
Major empirical research projects have recently reported results supporting the linkage between sustainability (i.e. environmental, social and corporate governance) factors and improved stock prices and shareholder value.
Regulators, intermediaries and institutional investors have undertaken unprecedented efforts to focus financial sell-side research on long-term corporate value. In addition, for the first time, a major group of institutional investors in the Enhanced Analytics project have agreed to allocate a minimum of broker commissions to long-term securities analysis that effectively incorporates extra-financial measures of performance and corporate intangible measures of success.
By building on the discussion held at the London Summit, The Conference Board Global Corporate Governance Research Center intends to further the dialogue among corporate executives, fund mangers and financial researchers so as to facilitate a mutually beneficial and collective effort.

The following are the London Summit Delegates' suggestions for future action:

To Unlock the Corporate Link:

Widespread adoption of an enterprise risk management (ERM) framework should be encouraged as an effective process to assess and respond to strategic and operating risks, not only to bring clarity to the long-term strategic direction a business should take but also to clearly communicate such long-term strategy to the market.
Further studies should be undertaken regarding the deployment of "intangible assets" (such as quality, customer and employee satisfaction, environmental compliance). Research should be diversified by type of industry and geographical region, so as to develop a set of sector-specific financial and extra-financial performance metrics.
Proposed disclosure frameworks to enhance corporate transparency on intangible assets and extra-financial measures of performance should be supported by empirical research on their application.
Research on intangible assets and extra-financial measures of performance should be based on voluntary trial programs where, in addition to filing their regular annual reports, participating companies provide financial analysts and large investors with a more comprehensive set of information on their value drivers.

To Unlock the Investor Link:

Pension fund trustees should develop internal governance practices consistent with a long-term investment outlook.
The transition from antagonism to engagement of certain long-term investors-especially regarding long-term strategic discussions-should be fully explored. Cases should be identified where companies have successfully discussed their long-term strategies with investors and where those investors have acted to support these long-term strategies by eschewing the lure of short-term price fluctuations.
Additional legal research would help understand the extent to which an investment manager may push for a long-term strategic agenda consistent with observing his fiduciary duties.
The motivations for the activism of hedge funds and other alternative investment vehicles should be investigated to ensure that their impact on certain market trends (i.e. short-termism versus long-termism) is fully understood.

To Unlock the Analyst Link:

Studies should be promoted to identify a viable business model to profit from the sale of high-quality investment analysis regarding how to build a durable, long-term portfolio.
Bold efforts undertaken to enhance disclosure and long-term analysis by organizations such as United Nations Environment Programme Finance Initiative (UNEP FI), the Enhanced Analytics Initiative (EAI) and the American Institute of Certified Public Accountants (AICPA) should be reinforced to develop a new cadre of securities analysts and financial intermediaries focused on long-term corporate valuation.
Enterprise risk management (ERM) frameworks should include a set of enterprise-wide procedures to better communicate extra-financial indicators of performance to the investment research community.

The Conference Board Global Corporate Governance Research Center is following its London Summit by convening its delegates for a Washington D.C. Summit to be held on March 29th in conjunction with The Council of Institutional Investors' Annual Meeting.

Dr. Brancato concludes: "We will be discussing specific action items called for in this report including how to reduce the emphasis on quarterly earnings and how asset managers such as public and private pension funds can direct their investments for the long term and still act as fiduciaries for their beneficiaries."

Source: Revisiting Stock Market Short-Termism, The Conference Board, Research Report
R-1386-06-RR

Information on ordering this publication can be obtained by calling The Conference Board's Customer Service Department at (212) 339-0345 or here on The Conference Board website. Media can request a free copy by calling (212) 339-0231.

About the Author

Dr. Matteo Tonello is Senior Research Associate and Acting Associate Director at The Conference Board Global Corporate Governance Research Center. He received a Master of Laws degree from Harvard Law School and a J.D. from the University of Bologna. He also earned a Ph.D. in Law from the St. Anna Graduate School of the University of Pisa (Italy). Dr. Tonello was a Visiting Scholar at Yale Law School in 1997 and practiced corporate law at Davis Polk & Wardwell from 1998 to 2004. Recently, he advised the Italian National Commission on corporate governance reform on the effects of the Sarbanes-Oxley Act on foreign private issuers, and contributed to the drafting of the two final reports by the Commission. He is the author of a book in Italian on international convergence of corporate governance standards.

About the Summit Series Director

Dr. Carolyn Kay Brancato is the Director of The Conference Board Global Corporate Governance Research Center. She recently served as Director of The Conference Board's Commission on Public Trust and Private Enterprise and is currently the Director of The Conference Board's Directors' Institute, an initiative to provide education to members of corporate boards. She has written two major books on corporate governance and has been invited to speak on global trends in governance by leading corporate, investor and governmental organizations in the United States, United Kingdom, Canada, Mexico, France, Germany, Sweden, Spain, Portugal, Malta, Brazil, Chile, Australia, Japan, Hong Kong, Singapore, Thailand, India, China, Russia, Oman and Kuwait.

About The Conference Board

Non-partisan and not-for-profit, The Conference Board is one of the world's leading business membership and research organizations. The Conference Board produces the Consumer Confidence Index and the Leading Economic Indicators for the U.S. and other major nations. These barometers can have a major impact on the financial markets. The Conference Board also produces a wide range of authoritative reports on corporate governance and ethics, human resources and diversity, executive compensation and corporate citizenship. Our conference and council programs bring together more than 12,000 senior executives each year to share insights and learn from each other.

About the Summits

Beginning in fall 2003, The Conference Board's Global Corporate Governance Research Center initiated a series of Corporate/Investor Summits convening major U.S. and UK corporations and investors to discuss issues of mutual concern. The goal of these summits is to develop a series of "best practices," followed by specific actions for both companies and investors to improve the way they communicate.

The Conference Board's "best practices" and non-advocacy approach is to search for exemplary practice behaviors within existing regulatory and legal frameworks, rather than to recommend changes in law and regulation. The London Summit in July 2005 was sponsored by PricewaterhouseCoopers and hosted by Standard Life Investments Ltd. It was held at The Association of British Insurers in London.

Moderator: Carolyn Kay Brancato, Director, Global Corporate Governance Research Center, The Conference Board, Inc.

Mark Anson, Chief Investment Officer, CalPERS

Laurie Bassi, Chief Executive Officer, McBassi & Company

Lydia I. Beebe, Corporate Secretary, Chevron Corporation

David Bishop, Head of Risk Assurance Services, PricewaterhouseCoopers LLP

Carolyn Bresh, Head of Global Finance, Reuters Group PLC

Andrew Clearfield, President, Investment Initiatives LLC

Paul Clements-Hunt, Head of Unit, United Nations Environment Programme (UNEP) Finance Initiative

Paul Costello, Chief Executive Officer, New Zealand Superannuation Fund

Stephen M. Davis, President, Davis Global Advisors, Inc.

Richard Dobbs, Partner, McKinsey & Company

Patricia C. Dunn, Vice Chairman, Barclays Global Investors; Chairman, Hewlett-Packard Company

Robert Eccles, President, Advisory Capital Partners, Inc.; Advisor and AICPA Representative, AICPA Enhanced Business Reporting Initiative

Jack Ehnes, Chief Executive Officer, CalSTRS

Fiona Ellard, Director, Merrill Lynch Investment Managers

Margaret M. Foran, Vice President, Corporate Governance and Secretary, Pfizer Inc †; ICGN Board Member

Richard Frederick, Advisor, UNCTAD, Corporate Governance Disclosure Requirements Project Governance and Ethics

John Garbutt, Director, Global Head of Corporate Governance, HSBC Asset Management

Mark Goyder, Director, Tomorrow's Company

Keith Holland, Senior Director, Associate Service Europe, The Conference Board Europe

David J. Jackson, Special Counsel and Company Secretary, BP plc

Keith Johnson, Chief Legal Counsel, State of Wisconsin Investment Board

Guy Jubb, Investment Director, Head of Corporate Governance, Standard Life Investments Ltd.

Cynthia B. Kane, Special Assistant to the Secretary of State International, State of Delaware

Geoff Lindey, Strategic Adviser, Corporate Governance, National Association of Pension Funds (NAPF)

Jonathan Low, Partner and Co-Founder, Predictiv, LLC

Rosemary Martin, Company Secretary & General Counsel/ Director, Reuters Foundation, Reuters Group PLC

Ian Matheson, Chief Executive Officer, Australasian Investor Relations Association

Nell Minow, Founder and Editor, The Corporate Library

Peter Montagnon, Head of Investment Affairs, Association of British Insurers (ABI)

James Montier, Global Equity Strategist, Dresdner Kleinwort Wasserstein (DRKW)

David G. Morgan, Chief Executive, Coal Pension Trustees Services Ltd.

Jonathan M. Payson, Senior Vice President, Director of Corporate Operations, Wellington Management Company, LLP

Christian A. Plath, Former Associate Director, Global Corporate Governance Research Center, The Conference Board, Inc.

Mark Preisinger, Assistant Vice President and Deputy Secretary, Director of Share-Owner Affairs, The Coca-Cola Company

Arthur Probert, Research Associate, Tomorrow's Company

Barbara M. Reno, Managing Director, The Conference Board Europe

Alastair Ross Goobey, Chairman, Hermes Focus Fund, Member of the Board of Governors, ICGN

Antony JC Ruddenklau, Senior Manager, Risk Assurance Services, PricewaterhouseCoopers LLP

Linda E. Scott, Director, Corporate Governance, TIAA-CREF

Rolf Skog, Legal Expert, Swedish Company Law Committee, Ministry of Justice, Sweden

Anne Simpson, Executive Director, ICGN

Daniel Summerfield, Adviser, Responsible Investment, Universities Superannuation Scheme (USS) Ltd

Raj Thamotheram, Senior Adviser, Universities Superannuation Scheme (USS) Ltd

Matteo Tonello, Acting Associate Director and Senior Research Associate, Global Corporate Governance Research Center, The Conference Board, Inc.

John C. Wilcox, Senior VP and Head of Corporate Governance, TIAA-CREF; ICGN Board Member

Gregory Wurzburg, Senior Economist, Directorate for Education, OECD

Ann Yerger, Executive Director, Council of Institutional Investors

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For further information contact:
Frank Tortorici
(1) 212 339 0231
f.tortorici@conference-board.org