An argument is raging on Wall Street. Some institutional investors are hoping to win it.
Over the past year, questions have increasingly been raised over whether corporations are losing sight of the future by obsessing over short-term financial performance. Vice President Joe Biden is even getting involved: In a September 27 op-ed for the Wall Street Journal, he called this short-term mindset “one of the greatest threats to America’s enduring prosperity.”
Last week a powerful coalition of investors and corporate executives met in New York for the first-ever board meeting of the new not-for-profit organization FCLT Global, formerly known as Focusing Capital on the Long Term. The aim is clear: rectify corporate misbehavior. “Each and every day that a short-term decision is made, we are destroying value,” Mark Wiseman, FCLT Global chair and head of active equities for BlackRock, said at an exclusive conference to commemorate the event later that day.
In 2013 Wiseman, who was CEO of the Canada Pension Plan Investment Board at the time, started the FCLT initiative with McKinsey & Co. boss Dominic Barton after discovering a mutual concern over the direction of global industry. The two organizations spent the past 3 years collaborating on research and building support among the investor and corporate communities. In July, together with BlackRock, The Dow Chemical Company, and Indian conglomerate Tata Sons, CPPIB and McKinsey founded FCLT Global as a non-profit organization.
The group recruited Sarah Williamson as CEO from Wellington Management Co., where she was a partner and director of alternative investments.
“This is not a PR exercise,” Williamson tells Institutional Investor in a telephone interview. FCLT Global hopes to act as a hub for disseminating research and best practices for long-term value creation. In September FCLT Global released a whitepaper, leveraging data from a McKinsey Quarterly survey panel, that found 87 percent of executives worldwide felt the most pressure to demonstrate financial results within two years, up from 79 percent in 2013.
According to Williamson, short-term pressures come from a variety of sources, ranging from the way management teams are incentivized to pressure from activist investors. “The activist will be long gone after the stock has rallied from the repurchases, and we’ll be sitting there with this impaired company,” Larry Fink, BlackRock’s CEO and a strategic advisor to the FCLT, said at the recent New York event.
BlackRock poached Wiseman from CPPIB in September, but the C$287.3 billion Canadian pension fund remains an avid supporter. Its new chief executive Mark Machin sits on the board. “We like to say a quarter for us is not three months, it’s 25 years,” Machin said at the event
Though FCLT Global only has 5 full- and part-time employees on its payroll, Williamson says they can draw on a global team of 20-odd professionals across their 22 member organizations. FCLT Global’s work won’t stop at research. Its founders are adamant that the organization won’t be a run-of-the-mill think tank. “It was always meant to be a do-tank,” Wiseman said at the event.
With help from supporting organizations, Williamson hopes to put practical tools in the hands of investors and corporations. “When we talk to people who want to be members, we emphasize that we’re looking for the commitment of their C-suite people, and we’re also looking for contributions of intellectual capital,” says Williamson.
At the World Economic Forum in Davos, Switzerland, CPPIB along with five other FCLT members — the Ontario Teachers’ Pension Plan, Dutch pension manager PGGM, Danish pension fund ATP, the New Zealand Superannuation Fund, and Singapore’s sovereign wealth fund GIC — unveiled a new stock index, designed by S&P Dow Jones Indices, that aims to identify companies focused on long-term value creation. The group committed $2 billion to tracking the index, with half coming from CPPIB in an internally managed portfolio. “We put our money where our mouth is,” Machin said at the New York event.
In addition to the founders, FCLT Global has 17 other member organizations and has gained some traction outside the financial services industry with the likes of BP, Unilever, and The Dow Chemical Company. “Whether it’s an oil company or consumer products or chemicals, whatever company it may be, most industries are changing fairly rapidly, and they need to think about over the long-term where is that industry going and how are they best preparing for that now,” says Williamson.
While questions have been raised about quarterly expectations, others ask whether such a push simply excuses poor quarterly performance. That’s a criticism hurled at founding member Tata Sons. The Indian conglomerate, with over 100 business lines from jewelry to information technology services, has been known to prop up lossmaking businesses in the name of social responsibility. “As we push the boundaries, there will always be failures, and we expect these as part of our entrepreneurial model,” Tata Sons chair Cyrus Mistry said at the event. “I’m not embarrassed to admit that exits for us are always a last resort.”
Follow Jess Delaney on Twitter at @jdelaney_NYC.