How boards and directors can help address the problem of excessive short termism

Excessive short-termism continues to be a problem for Australian companies and directors in creating long term value for shareholders.

Is Short-Term Behaviour Jeopardizing the Future Prosperity of Business?

The Conference Board, October 2015

Yes, Short-Termism Really is a Problem

Harvard Business Review, October 2015

The Role of Institutional Investors in Curbing Corporate Short-Termism

Robert C Pozen, Enterprising Investor, August 2015

Curbing Excessive Short-Termism: A Guide for Boards of Public Companies

Louise Pocock, April 2013 (published by AICD)

Excessive short-termism continues to be a problem for Australian companies and directors in creating long term value for shareholders. It also presents broader social and economic challenges, including in relation to the need to address climate change, innovation and investment in infrastructure.

The investor community has also raised concerns about excessive short-termism. Recently, Chairman of Blackrock, Larry Fink, urged CEOs of the S&P500 to focus on adopting a long term approach to creating value for shareholders.

The AICD’s latest Director Sentiment Index results also confirm that Australian directors want reforms that serve Australia’s long-term economic interests, including a greater focus on longer-term objectives such as infrastructure investment and innovation.

A 2013 AICD paper by the Deputy Executive Director of the Governance Leadership Centre, Louise Pocock, provides some recommendations to assist directors and boards of public companies to curb excessive short-termism. This paper has been adopted by the Global Network of Director Institutes.

We set out below some of the recommendations from the paper, as well as some recent examples of companies engaging in behaviour to help curb excessive short-termism:

1. Set long-term strategic goals, including in relation to R&D and capital allocation: Boards can help curb excessive short-termism by having a clear plan for long term value creation, including investing in research and development and developing longer-term capital allocation policies. A recent example of this is Incitec, an industrial chemical, fertiliser and explosive manufacturer, which invested $1 billion in plant and equipment in the US despite short-term demands of shareholders.
   
2. Promote a corporate culture that drives long-term value creation: A recent example of this is the supply logistics company, Brambles, which is investing more than $2 billion over the next 4 years in pallets and the management and control of other pooling assets. "If you want to keep the wolves at bay, make sure you are looking after your customer", said Brambles CEO, Tom Gorman. “We are not going to take actions in the short term that put at risk the long-term value creation objectives of the company.”
   
3. Reconsider executive remuneration: Boards should consider basing a meaningful proportion of executive remuneration on long-term incentive (LTI) measures that align with the company’s long-term strategy and look beyond share market performance only. According to a recent survey of 250 listed companies in the US, over half of CEOs (56%) are now incentivised for long-term performance on the basis of performance-based full value shares / units. This is a positive movement and corresponds with a 12% decline in the use of stock options and stock appreciation rights (SARs) as long term incentives.
   
4. Seek to influence investor behaviour: Boards should seek to influence investor behaviour by working with management to adopt a public relations strategy that effectively communicates the company’s long-term goals and strategies. Boards could also consider adopting policies that reward long-term shareholders. Differential voting rights for long-term shareholders has already been considered in Europe, however the European Parliament has recently rejected proposed reforms to the Shareholder Rights Directive.
   

“Short-termism is a broader social issue, driven by technology, information ubiquity, changing consumer habits and the role of global and social media”, says Louise Pocock, Deputy Executive Director of the Governance Leadership Centre.

“To achieve long term objectives, directors need to provide bold leadership and long-term vision rather than focusing on short-term shareholder expectations”.