Mark Tulay: Big asset managers advocate for the long-term investor movement

Recently the CEOs of the largest global asset management firms each put portfolio company executives on notice that their current short-term focus can be a barrier to long-term growth. Larry Fink, CEO of BlackRock, led the charge with his 2016 corporate governance letter to CEOs, saying, “today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need…We are asking every CEO to lay out for shareholders each year a strategic framework for long-term value creation.”

Just 25 days later, Fink’s sentiments were echoed in a letter from Ronald O’Hanley, President and CEO of State Street Global Advisors, who warned of “the perils of companies focusing on short-term results at the expense of long-term value creation.”

A few days after that, Vanguard Chairman and CEO William McNabb explained how “good governance is a key to helping companies maximize their returns to shareholders” over the long-term and reminded companies how “in the past, some [companies] have mistakenly assumed that our predominant passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth.”

This isn’t just a philosophical discourse, the “Big Three” asset managers – Vanguard, BlackRock, and State Street – with combined assets under management of more than $11 trillion, mean business. They are encouraging publicly traded companies to adopt and regularly disclose long-term strategic plans and governance practices.

And it is not just the Big 3 making the case for long-termism. Many other asset owners, financial institutions, and CEOs are taking a similar stance. Clara Miller, CEO Emeritus of The Heron Foundation, observes that well-managed and ethical enterprises of any size or tax status that combine mission and money in their regular operations create long-term value, while poorly managed organizations that separate mission and money routinely extract short-term value.

This alignment and congruence among leading investment managers, and their leaders’ public communications in support of long-termism, is thought by many to be unprecedented. How should forward-looking CEOs and boards respond?

Long-termism and ESG Integration: Making the Connection

As the Director of CECP’s Strategic Investor Initiative, an effort to shift trillions in investor assets to companies that move away from the current myopic focus on short-term results, and adopt and communicate long-term strategies that integrate financially material environmental, social and governance (ESG) factors, the question I’m asked often is, “What’s the connection between long-termism and ESG adoption and integration?”

Despite a shifting regulatory environment, the demand for companies to think long term and incorporate environmental, social and governance (ESG) factors into their business model is growing. Academic research shows that CEOs who incorporate sustainability into strategy, and have the discipline to also manage short-term financial expectations create more shareholder value. While achieving the right environmental, social and governance (ESG) balance requires an investment of time and money, this shift in corporate strategy promises to deliver sustainable value and reduce risk in the long run.Investors are now asking for 3- to 5-year goals and are encouraging CEOs to align their corporate objectives with those of their key constituencies. Managing to long-term goals that take a holistic view of the business creates the context for the short-term communication about quarterly earnings. That’s why increasingly, America’s largest institutional investors are asking the companies they invest in to provide long-term plans that integrate financially material ESG factors.

Professor Clayton Christenson of Harvard Business School illustrates this point looking back at the telecommunications industry as it existed some 15 years ago. At that time, Lucent and Nortel were the “darlings” of that industry, while Cisco was a relatively unknown. Over the next ten years, Cisco would ultimately overtake Lucent and Nortel and emerge as the clear industry leader. Why did this happen?

Dr. Christensen opined that Lucent was vulnerable because they focused too much on maximizing their short-term quarterly profitability and did not invest enough in long-term R&D. “Tomorrow’s investments that pay off tomorrow go right to the bottom line, and are much more tangible than investments that pay off ten years from now,” he said. “The reason some successful companies fail is they are drawn to investing in things that provide the most immediate and tangible evidence of achievement…often with sad long-term results.”

Companies that fail to balance short-term expectations with long-term results often overlook the importance of identifying and developing strategies to address material risks and opportunities in environmental, social and governance-related aspects of their operations and governance structure. For example, unchecked global climate change represents material environmental financial risks to many companies and opportunities for others, but these long-term risks are mostly absent from quarterly earnings calls and annual disclosures.

Societal shifts, changing cultural norms, and “planetary boundaries” create, for each company, its own unique future set of material risks and opportunities – often invisible to short term investors – and traditionally viewed as non-material on a quarter-to-quarter basis.

Leaders of the “Big Three” global asset managers, Vanguard, State Street and BlackRock, have begun to make the case that the long-term return horizon of their largely indexed portfolios needs congruent strategy disclosure from their portfolio companies to begin communicating strategies that look three, five, and even ten years ahead. They also point out that long-term performance plans create the context for ‘building blocks’ for short-term financial success, and are not a substitute for transparency.

CECP, “The CEO Force For Good, “was founded by actor, entrepreneur and philanthropist Paul Newman, and John Whitehead, former Chairman of Goldman Sachs. They believed corporations and their leaders can and should be a force for good in society. CECP’s Strategic Investor Initiative (SII) is a logical extension of this vision – creating forums where CEOs can present long-term plans to long-term investors, and demonstrate the greater sustained earnings power proven to come from longer-term thinking.

Leveraging CECP’s network of 200 CEOs and companies – representing over $7 trillion in revenues – SII is developing a public disclosure platform to help CEOs of the world’s largest corporations unlock the value of long-termism.
CECP’s CEO-Investor Forums allow attending investors to gain insight on a company’s long-term strategic plan including:

• Long-term capital allocation.
• Significant stakeholders and their long-term expectations
• Metrics to track long-term progress on health, financial, operational, environmental, social, and governance factors.
• Corporate governance structure and incentive system alignment to support long-term planning and manage short-term performance.

A New Ecosystem of Initiatives to Drive Long-Term Value Creation

A new opportunity exists today for business and investors to collaborate and build on this vision of long-term leadership. Companies now have an opportunity to shape this next generation of long-term plans. Four key initiatives are gaining momentum, and each is ramping up stakeholder participation. These include:

1. The Sustainability Accounting Standards Board (SASB) develops sector-based accounting metrics suitable for disclosure in standard filings such as the Form 10-K and 20-F. Through its evidence-based approach, SASB can dramatically accelerate how companies improve the precision, and disclosure of material sustainability indicators.

2. Focusing Capital on the Long-Term (FCLTGlobal). FCLTGlobal is an initiative for advancing practical actions to focus business and markets on the long term. FCLTGlobal’s mission is to develop practical structures, metrics, and approaches for longer-term behaviors in the investment and business worlds. In addition to hands-on research, FCLTGlobal’s founders and members will advocate for adoption of these structures and metrics within the investment community and in corporate boardrooms.

3. The Task Force on Climate-Related Disclosures (TCFD) develops voluntary, consistent, climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. TCFD considers the physical, liability, and transition risks associated with climate change and what constitutes effective financial disclosures across industries. The work and recommendations of TCFD will help firms understand what financial markets want from disclosure to measure and respond to climate change risks, and encourage firms to align disclosures with investors’ needs.4. Global Reporting Initiative (GRI) is an independent organization that helps businesses, governments, and other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, and corruption.

Collectively these four initiatives, each with a distinct, but linked role in the emerging long-termism landscape, will:

• Transform corporate disclosures for material information and value generating strategies;
• Reposition corporate reporting to tell a more complete story of how an organization’s strategy, governance, performance and products lead to the creation of multi-stakeholder value and enterprise viability over the long term;
• Improve the disclosure precision of sector-based environmental, social, and governance (ESG) performance indicators and accounting metrics;
• Accelerate the integration of long-term value factors into investment and credit rating decision making.

In September, CECP will convene for the second time this year a group of leading institutional investors, CEOs and other senior leaders from global companies at its second CEO Investor Forum in New York City. Participants will learn about long-term corporate strategies, including plans to address material environmental, social and governance risks and opportunities, from visionary executives who have taken to heart Ms. Miller’s notion that creating value over the long term is ultimately the better path to prosperity – for everyone – and that extracting value through focusing solely on short-term results yields to lower returns over the long term. Companies will be rewarded for this new long term approach, while those who choose the short-term status quo are likely to end up, in Dr. Christensen’s words, delivering “sad results.”

For more information on CECP, the Strategic Investor Initiative, and the CECP CEO Investor Forum scheduled for September 19, 2017, please visit CECP.