The Canada Pension Plan Investment Board and McKinsey & Co. have just launched a joint research initiative that will focus on re-orienting institutional investors and their portfolio companies towards long-term value creation. As part of the project kick-off, Dominic Barton, Global Managing Director of McKinsey, and Mark Wiseman, President and CEO of CPPIB, released a sort of joint-white paper that outlines their rationale for doing this this project and what they hope to achieve. The document is well worth your time to read; it’s full of interesting information and insights. Here are some of the highlights:
Wiseman: "...the pervasiveness of short-termism stretches well beyond public markets into our investment world, our businesses, and into society as a whole. Personally I came to this realization in recent years as an increasing number of public company CEOs came to speak to me about going private. They wanted to do this, in almost every circumstance, not to make a quick buck, but because they were increasingly frustrated, in the public market context, about not being able to make the “right” long term decisions for their companies... If I had to boil our hypothesis today down to three words, they would be this: patience promotes prosperity.”
Barton: “From thousands of meetings with CEOs, it is clear to me that executives are under increasing pressure from shareholders, analysts, the media and Boards to deliver short-term gains and explain short-term losses. Which is not helped when CEOs are increasingly given less time to demonstrate the impact of their decisions... To understand this issue in more detail CPPIB and McKinsey, through the McKinsey Quarterly, carried out a global survey of public and private directors and senior executives, we received more than 1,000 responses from around the world. 63% of those business leaders told us that the amount of pressure on their senior executives to demonstrate strong short-term financial performance has increased in the past five years... 55% of CFOs have indicated they would forgo an attractive capital investment project today if the investment led them to even marginally miss their quarterly earnings target... But in our global survey 44% of business leaders said their company’s management team currently uses a primary time horizon of less than 3 years when they conduct a formal review of corporate strategy. Yet at the same time 73% said this primary time horizon should be more than 3 years – 11% said it should be more than 10 years... Clearly, leaders are aware that they should be thinking longer-term. But the reality we face today is that few seem to be doing so.”
So the executives know what they have to do in order to create long term value, but they’re not doing it because they want to to please short-term markets and stakeholders? Yeah, that sounds about right...
As a plan for moving towards a longer-term, value-based orientation, the authors offer “six ideas” that they will investigate going forward:
“For Institutional Investors that requires:
1) An asset owner-led collaboration and engagement platform
2) ‘Activated’ passive holdings
3) And a set of agreed upon engagement principles
And for Corporate Boards that means:
1) Long-term value committees
2) New compensation models that reflect the workload Directors have, and reward them over at least a product or risk cycle
3) Narrative integrated reporting rather than quarterly earnings”
Anyway, congrats to these two guys and their organizations for taking the lead on such an important project. I look forward to seeing how it develops. Download the paper here.
