Getting serious about the problem of short-termism

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by Greg Bright

“Everyone wants to be long-term in their thinking, but they all feel that they are getting pressure from ‘the other guy’, whoever that is,” Sarah Williamson said last week on a visit to Sydney, Melbourne and Auckland. She is the chief executive of FCLTGlobal, a unique not-for-profit organisation aimed at reducing short-termism by companies and investors.

FCLTGlobal (Focusing Capital on the Long Term), based in Boston, was set up in 2016 but already has about 50 fund managers, asset owners and other service providers as members. They include Australia’s Future Fund, which hosted a breakfast in Melbourne for her, and the New Zealand Superannuation Fund, which she also visited. She spoke at the ICPM (International Centre for Pension Management) discussion group in Sydney.

Williamson spent just over 20 years at Wellington Management Co, mainly in Boston although she also set up that firm’s San Francisco office and frequently visited the Sydney office. Wellington, a well-regarded diversified equities house, prides itself on taking a long-term view with its strategies. It has about US$1 trillion under management.

FCLTGlobal provides research and tools for its members to help them attack the problem. “We try to get everyone together to try to extend their time horizons,” Williamson said in an interview in Sydney. The organisation’s latest paper is: “Predicting Long-term Success: for corporations and investors worldwide” Key takeaways from the paper are:

  • Global companies are falling short on long-term behaviours –
    companies are scoring lower than they did in 2014, and well below the level reached before the financial crisis. If companies were more long-term, the research suggests they could earn an additional US$1.5 trillion per year in returns on invested capital.
  • Overdistribution of capital can be a drain on corporate performance – although distributing capital via buybacks and dividends makes sense in some circumstances, our analysis finds that companies taking this approach tend to generate lower five-year return on invested capital (ROIC). The FCLTGlobal research suggests that companies that reinvest greater portions of their earnings back into the company outperform their peers in ROIC by9 per cent a year, on average.
  • Corporate research and development (R&D) can boost returns –
    by looking at the marginal value of additional research spending, the paper shows that R&D investments are linked to higher ROIC.
  • Employee ownership is linked to higher returns among global asset managers – employee ownership is the strongest predictor of success for asset managers, particularly those in equity investing, and
  • Net returns for asset owners are linked to both governance and investment strategy – relevant factors include board diversity, active ownership, lower costs, a higher funded ratio, and higher exposure to both public and private equity.

Five of the major inputs to consider in helping to change thoughts and actions so both investors and investee companies move towards a longer-term approach, Williamson says, are:

  1. Governance – there are often different time frames between boards and members (a 50-60-something director or trustee is unlikely to have the same horizon as a 20-something member).
  2. Incentives – it’s “very important” to realign incentives (for executives and directors of corporations and fund managers) to long-term goals.
  3. Engagement – people are often talking “past each other”. Williamson says: “It’s a bit like eating spinach; you know you should do it, but you don’t want to.”
  4. Investment strategies focused on the long-term will be a like a ‘J-curve’, whereby returns may go down for a little while and then pick up quite quickly. Important inputs, such as talent, innovation, capital projects and risk management, all require long-term time frames to do well, and
  5. Metrics – what are the indicators to tell whether a company or fund manager has a long-term horizon? FCLTGlobal has forthcoming work in this area, due out next year, that will explore metrics that can incorporate pre-financial drivers of long-term value into investment decision-making.

Not all asset owners are the same, of course, but Australian super funds should be prime candidates to avail themselves of FCLTGlobal’s assistance. Australia has the highest proportion of defined contribution funds in the world and several of our biggest funds, such as REST Super and Hostplus, have a membership base with an average age in their 20s or 30s.

It’s true we have an aging population and the baby-boomer bubble generation is either in or approaching retirement, but Australia and New Zealand’s demographics are better than many countries, helped by relatively high immigration rates.

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