01 Dec. 2014 | Comments (0)
As a private company, Dell now has the freedom to take a long-term view. No more pulling R&D and growth investments to make in-quarter numbers. No more having a small group of vocal investors hijack the public perception of our strategy while we’re fully focused on building for the future. No more trade-offs between what’s best for a short-term return and what’s best for the long-term success of our customers. For example, in the past year we have made investments of several hundred million dollars in areas with significant time horizons, such as cloud and analytics, that might not have been feasible in today’s environment for public companies.Indeed, short-termism is causing observable shifts in corporate strategies, not only in activist situations but also more pervasively among companies seeking to preempt an activist attack or otherwise meet shareholder expectations. In a letter issued this past March to CEOs of S&P 500 companies, Laurence Fink, Chairman and CEO of BlackRock, expressed concern “that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buy-backs.” Data compiled by the S&P Dow Jones Indices suggests in the 12-month period ended June 2014, S&P 500 companies returned a record amount of cash to shareholders, consisting of approximately $533 billion in buybacks and $332.9 billion in dividends. S&P 500 companies are on track to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings, according to Bloomberg and the S&P Dow Jones Indices. This in turn is impacting capex levels: Barclays has estimated that the portion of cash flow allocated to capex is down to 40% from more than 50% in the early 2000s, and annual data compiled by the Commerce Department indicates the average age of fixed assets reached 22 years in 2013, the highest level in almost 60 years. In this environment, the need for boardroom resolve and commitment to long-term growth is critical not only for companies, but also for the vitality and competitiveness of American businesses in the global economy. A long-term oriented, well-functioning and responsible private sector is the country’s core engine for economic growth, national competitiveness, real innovation and sustained employment. Achievement of these objectives requires prudent reinvestment of corporate profits into research and development, capital projects and other value-creating initiatives. In addition, in thinking about the company’s long-term strategy, the board should consider not only its shareholders, but also the broader group of constituencies—including employees, creditors, customers and local communities. The interests of these constituencies tend to converge with long-term shareholder interests insofar as they ultimately impact the sustainability and vitality of the company’s operations and business relationships. Moreover, they are integral to the overall purpose and role of the corporation as the engine of American prosperity. Activism and short-termism should not be allowed to continue to retard GDP growth. Responsible investors and corporations must work together to protect our economy. One promising proposal to reverse the growing focus on short-term performance and to build value for the long term is set forth in an important article by Dominic Barton, Global Managing Director of McKinsey & Company and Mark Wiseman, President and CEO of the Canada Pension Plan Investment Board, “Focusing on Long Term Capital,” in the January-February 2014 issue of the Harvard Business Review (a summary is accessible at this link: Focusing Capital on the Long Term). Noting that short-termism “is undermining corporate investment, holding back economic growth and lowering returns for savers,” they propose that “large asset owners such as pension funds, mutual funds, insurance firms, and sovereign wealth funds … adopt investment strategies aimed at maximizing long-term results” and that the “other key players—asset managers, corporate boards, and company executives … follow suit.” This is exactly the kind of proposal that boards and responsible investors should be working together to promote. About the Guest Bloggers: [caption id="attachment_2552" align="alignleft" width="300"] Wachtell, Lipton, Rosen & Katz[/caption] Martin Lipton, Steven A. Rosenblum, and Karessa L. Cain are partners with the law firm Wachtell, Lipton, Rosen & Katz. This post originally appeared as a Wachtell Lipton memo on December 1, 2014.