Corporate and investor strategies for managing market short-termism

Companies that operate with a long-term outlook have consistently outperformed their industry peers since 2001 across almost every financial measure including revenue, earnings and job creation. Similarly, strong corporate performance on environmental, social and governance (ESG) factors correlates positively with improved cost of capital and financial performance. However, research shows that companies will forego efforts to create long-term value because of pressure to meet short-term objectives.

In 2015, 193 world leaders agreed upon 17 Sustainable Development Goals (SDGs), covering issues ranging from climate change to gender equality. The SDGs provide an opportunity for business leaders, investors and companies alike to re-think their approach to value creation, serving as a blueprint for action in both capital and investment markets. However, excessive short-term pressure will hamper progress unless action is taken by both companies and investors.

The perceived investor emphasis on short-term financial performance creates pressure on companies to focus on short-term financial performance and pay less attention to fundamentals. It can result in foregoing opportunities with a positive long-term net present value, including those that provide wider sustainability-related benefits. It can also affect how ESG factors are considered in strategy, capital expenditures and daily operations. Consequently, companies may miss opportunities to: drive sustainability-related innovation; develop their human capital; expand to new markets; grow their customer base; create operational efficiencies; and effectively manage social and environmental business risks.

Investors themselves are also under considerable short-term performance pressures, with the benchmarking and evaluation of investment managers often based on one- and three-month timeframes. Even those organisations with long-term investment time horizons often focus on quarterly or even monthly portfolio performance. Regulatory developments further influence short-term behaviours. Following the global financial crisis, for example, regulatory bodies began to place greater emphasis on short-term performance management and reporting, particularly in situations where pension funds have shortfalls against their liabilities.

While it is important to recognise that there are diverse external and internal pressures on companies that reinforce this emphasis on short-term performance, the relationship between companies and their investors is of fundamental importance. Encouragingly, both have become more vocal about the importance of combating the negative impacts of short-termism in recent times, such as through the Commonsense Principles of Corporate Governance, released by a group of CEOs in 2016. To create a truly sustainable financial system, which will play a role in achieving the SDGs, both investors and companies must join forces to drive meaningful change.

The Principles for Responsible Investment (PRI) and United Nations Global Compact released the first version of Coping, Shifting, Changing in 2014. The central premise of the report was that companies could be long-term even in a short-term world, offering practical recommendations on how to achieve this. This edition responds to feedback that investors could, and should, do more to support companies on those recommendations. It builds on important work done by other organisations also working to tackle this problem. It presents three main strategies, each including recommendations focused on measures that companies can adopt to address the problems caused by market short-termism, and actions that investors can take to support companies in those efforts.

The PRI and UN Global Compact will jointly engage their investor and corporate participants to encourage uptake of the report recommendations. Given the essential role of investor relations in advancing this area of work, both organisations are eager to engage these professionals and their trade associations, along with other key stakeholders.