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Imagine an ‘earnings call’ where neither the CEO nor the CFO make a call on what they think their earnings might be next quarter but instead talk about their three- to five-year long-term plan. Imagine an ‘earnings call’ where the CEO and the CFO talk about the future prospects of the company rather than what happened in the last three months.
Investors who are members of the Strategic Investor Initiative (SII), part of the CECP CEO Force for Good, have already experienced such an earnings call. Several of them, in fact. CECP was founded in 1999 by actor and philanthropist Paul Newman and other business leaders to “create a better world through business” and has been running investor forums where CEOs can do just that.
At the first forum in February this year, shareholders with over $25 trillion in AUM listened to the CEOs of Citi, healthcare company Humana and the CFO of IBM, among others, talk about their long-term plans. It’s going to happen again on 19 September with long-term plans with the CEOs of Aetna, Delphi, Allstate and Prudential Financial presenting. And in February next year, Ken Frazier, CEO of Merck, one of the first CEOs to have left Trump’s American Manufacturing Council, will be presenting the company’s long-term plans for sustainability and sustainable value, joining CEOs from Johnson & Johnson, Unilever and others.
They will be listened to by senior executives from BlackRock, State Street, Vanguard, Wellington, MFS, Goldman Sachs and more.
To find out a little more about this somewhat revolutionary development in ‘earnings calls’, I spoke to Tim Youmans, Research Director for SII and Mark Tulay, Director at SII. I asked Youmans what were the main conclusions of the first forum. He said: “We have outlined some of the evaluation criteria in a Journal of Applied Corporate Finance paper that came out in July.Long-term investors would like to see CEOs spending more time talking about their future story, talking about their long-term capital allocation plan, and, within the long-term capital allocation plan, to focus on ESG factors, especially laying out long-term measures for five years ahead in every single presentation. That’s what we’re trying to achieve.”
Tulay added: “We also are pushing CEOs to explain how they determine which ESG factors are financially material and why. And provide more of the story behind this, because we believe it’s better for a company to tell its story of long-term sustainable value creation. We’re trying to drive a race to the top, and for CEOs to provide the disclosures that Vanguard, State Street, BlackRock and others are seeking. What we’re looking for,” he continued, “is not CEOs speaking from scripted, teleprompter speeches, but an authentic voice from the company about how purpose and profits are interlinked. We don’t want to be overly prescriptive, but we want to drive comparability between these so that investors can get more value; we’re trying to find the sweet spot between those two. We found that CEOs really want to step up to this; they want to stand out and stand up.”
I asked whether CEOs were concerned about being ‘the first’ to disclose their long-term plans. “Gillian Tett from The Financial Times,” said Youmans, “asked Vanguard’s Bill McNabb, the new co-chair of our advisory council: ‘In your portfolio, if you had to list the saints, who would they be?’ He replied: ‘It’s not the majority, it’s definitely a minority, but you can start with the 200 CECP CEOs.’ We are getting zero push back from our member CEOs. The pushback we are getting is because of scheduling. We haven’t had any CEOs tell us ‘no’. What we have heard is things like: we’re locked in a competitive battle right now, we want to do a good job, just ask us next year.” I commented that this was not that far removed from my concerns about CEOs not wanting to be first
because… they don’t want to be first. Scheduling issues sounded to me a little like a way to be second or third or…. Having said that, clearly CEOs have presented at the investor forums. While these are not normal ‘earnings calls’, they are livestreamed and available to anyone who wants to listen.
Tulay explained the CECP’s NGO-driven mission: “We’re putting CEOs in the same room as their largest investors and asking them to present a long-term vision. The CEOs understand that they spend too much time on the short term and this gives them a way to get outside of that.” So if CEOs recognise that they spend too much time on the short-term, I asked why? “We do present in our paper longitudinal CECP survey data from CEOs for around 10 years,” said Youmans, “and our member CEO’s own opinion is that they spend too much time on the short-term and they want to be more long-term. And McKinsey data shows, from surveying a similar sample of CEOs, that the source of this pressure comes from a) shareholders and b), more importantly, the boards of these companies themselves. The CEOs are not getting long-term support from the boards and shareholders. So, we can’t fix the board issue – today, that’s outside our mission as the CEO Force for Good, but we can say ‘CEOs: maybe you’re not talking to the right investors’.”
I noted that the CEOs were clearly not talking about the investor members of SII, asset managers who have been very vocal about their concerns about short-termism. In addition, I said, these SII members are also typically not the people that you see on quarterly earnings calls. Youmans confirmed this, saying: “The data shows that only 15% of questions on earnings calls are, over a long period, buy-side. We had double that number asking questions at the first investor forum, and we’re set to exceed that in the September forum.”
“We’re presenting an alternative to what Larry Fink has called the quarterly earnings hysteria,” added Tulay. “It’s an opportunity to present stepping stones or building blocks for the long-term. Most of the companies presenting have shared the long-term plan they will be talking about with their board and most of thecompanies have shared it with their staff as well. For others, they’ll be live streaming this presentation to their staff. The most powerful voice on the planet for driving ESG transformation is CEOs. This is our chance, this is our moment and this is our focus: to mobilize the CEOs.”
I agreed that CEOs were fast becoming the most powerful voice on the planet for driving this kind of change, especially following Trump’s withdrawal from COP21. It is their opportunity to make Trump’s decision is irrelevant. CEOs have far more influence over switching to renewable energy and reducing carbon footprints than the government has in this country in any case. Youmans added: “The CEOs of the largest corporations are, frankly, transnational actors. And, even if the US opts out of the Paris climate agreement, these CEOs have global operations; especially in extractives where most of their operations are outside the US.”
We moved on to discuss the intersection of long-term value creation with ESG risks, measures and disclosures. “If you don’t talk about the long-term you don’t even get to ESG,” said Youmans. I said that financially material ESG and climate risk disclosures will have to be made by US companies regardless of whether the current administration or the SEC mandates them because, if they want to operate in Europe, they will have to make them there and shareholders will have access to them wherever they are.
“If you don’t talk about the long-term you don’t even get to ESG,”
Even where this is not the case, I noted, large shareholders everywhere are developing systems to assess the climate risk of companies in their portfolios using publicly available information from all sorts of sources but that it would be better for companies to get out ahead of that and have their own assessment out there rather than a potentially much more negative one from outside sources. “Yes,” Youmans said, “even if companies don’t disclose, for example, climate
performance, they are starting to be scored on these factors anyway by CDP, TrueValue Labs, MSCI and other investing data providers.”
“That’s a secondary goal for us,” said Tulay, “to serve as the stimulus to enhance ESG disclosure. Picture a CEO talking about his or her financially material ESG factors, and the next question is: where’s that reporting, where’s the disclosure, what standards do you follow, and where have you put the information out there? ESG reporting is a chaotic space still, and leadership is coming from Europe. What we’re doing is trying to get the US CEOs to be on board, and use these long-term plans to stimulate a broader discussion about what factors really matter to stakeholders not just shareholders.”
Both Tulay and Youmans offered a summary of the SII’s mission. Tulay started: “We are a conduit or a platform for the investment community to catalyze these long-term plans that include ESG factors. Through us, investors have a unique opportunity to lend their voice to shape this.We have 25 investor members on our advisory board, including our co-chair, Vanguard’s Bill McNabb, but there’s lots of room for people from Europe, so this seems a great opportunity for us to ask the question ‘what do you in Europe want to see in the long-term plans that are being presented?’ If this becomes the new normal in five years, we could see every publicly traded company disclose their long-term plans publicly to long-term investors through a combination of virtual and event driven platforms. This is not a slow scale-up effort, this is an aggressive growth effort. So far, we’ve been funded by foundations to do just that.” Youmans concluded: “We’re really trying to provide a venue for the long-term voice. We’re trying to solve the blame game, where CEOs say: ‘hey, we don’t talk about the long-term because you investors never ask us about it’, and investors say: ‘we never ask about it because you never put out any long term plans and measures’. It’s a dilemma. We’re simply trying to bust this communications paradigm.”
So, if you want to hear what the five-year plan is for CA Technologies, formerly Charles Wang’s Computer Associates and something of a posterchild of everything that was wrong with US corporate governance, you can listen in here.
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