McKinsey Study: Companies Focused on the Short Term Lag Peers, Drag Down GDP
New analysis from McKinsey & Co.and FCLT Global offers hard data on how long-term orientations improve economic and financial performance.
On the day of the first-ever board meeting of FCLT Global, chair Mark Wiseman made the nonprofit’s position clear: “Each and every day that a short-term decision is made, we are destroying value.”
Four months later, the group has the data to back Wiseman up. On average, U.S. companies with a long-term focus reported 47 percent higher revenue than other large and midsize businesses from 2001 to 2014, according to a study by McKinsey & Co. expected to be released today. They also showed less volatility and produced better returns for investors.
The study, which evaluated the performance of 615 large- and mid-cap U.S. firms between 2001 and 2014, is part of an ongoing initiative by FCLT to promote long-term behaviors in business and investment decision making. Researchers at McKinsey — one of FCLT’s five founding members — created a corporate horizon index based on patterns of investment, growth, earnings quality, and earnings management to identify firms that exhibited long-term behavior and compare them with those that didn’t.
Strategizing for the short term carries a “very clear, very real cost both to companies and to the economy,” said Tim Koller, a partner at McKinsey and an author of the report. “Companies have an opportunity to benefit by lengthening their horizons.”
Firms that scored the highest on the corporate horizon index “significantly” outperformed shorter-term peers on the basis of fundamentals like revenue, earnings, economic profit, and market capitalization, the study showed. Long-term companies — which represented 27 percent of the total sample — accounted for 44 percent of the growth in total returns to shareholders between 2001 and 2014, according to the findings.
Even as these companies may have suffered over the short term — including a harder hit to stock prices during the financial crisis — the report concluded that, overall, firms with long-term orientations created more value for both investors and the broader economy. If all publicly listed companies in the U.S. had taken a long-term approach, Koller and his fellow authors estimated that gross domestic product would have increased by an additional $1 trillion over the past ten years.
Led by CEO Sarah Williamson, Boston-based FCLT’s members include the Canada Pension Plan Investment Board (CPPIB), Singapore’s GIC, and Dutch pension manager PGGM. Wiseman, who is global head of active equities at founding member BlackRock and formerly CEO of CPPIB, sits on the board of directors with prominent investors, including Else Bos of PGGM and Lim Chow Kiat of GIC, as well as his successor at CPPIB, Mark Machin.
“For the first time we have a very independent, robust analysis driven by financial metrics that shows that while it is not always easy to be long term, it does pay off,” Williamson says. “Being long term is the right thing for the investor, it’s the right thing for the company, and it’s the right thing for the economy more broadly.”