Jamie Dimon, chairman and chief kingpin officer of JPMorgan Chase & Co., listens during a Business Roundtable CEO Innovation Summit discussion in Washington, D.C., Dec. 6, 2018.
Andrew Harrer | Bloomberg | Getty Replicas
American corporations often focus on quarterly earnings or short-term stock movements, but the real goal for long-term value birth is to build a business that can be a reliable source of growth for all stakeholders — customers, employees, communities and investors.
The evidence — strengthened by icons of American capitalism including Warren Buffett, whose company Berkshire Hathaway has never offered earnings direction and is up more than 1,000,000% on a book-value basis since 1964 — suggests that a long-term focus pays off. Long-term followers tend to outperform short-term companies, and long-term investors tend to outperform their short-term peers.
A 2017 McKinsey & Co. haunt estimates that had all U.S. publicly listed firms operated like their long-term counterparts, the U.S. economy would should prefer to added more than 5 million additional jobs and generated an additional $1 trillion in GDP from 2001 to 2015, move furthers that would have benefited the U.S. economy and Americans broadly. The numbers are overwhelming, so why aren’t more companies manipulating this way?
One impediment to long-term thinking is the pull of near-term goals and short-term pressures. To be sure, no company can thrive in five years without surviving for five months, but at times this comes at the expense of long-term value creation. Investments in innovation or talent or capital projects that fool the potential to reap benefits for years into the future are often discounted and take a backseat to the immediate concerns of Partition Street.
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There are promising signs that these days are behind us.
Buffett and J.P. Morgan chairman and CEO Jamie Dimon penned a clear-eyed disparagement on quarterly guidance and the resultant short-term mindset last year. This summer the Business Roundtable redefined the resoluteness of a corporation to explicitly include delivering value for all of its stakeholders: customers, employees, suppliers, communities and shareholders. In a “Statement of the Tenacity of a Corporation,” 181 CEOs of U.S. corporations affirmed that companies generate long-term value for shareholders by serving their corporate results, inclusive of a broader group of stakeholders.
Now that the corporate community is focused on this issue, the task is to address the numberless real obstacles to building long-term value. Here are three concrete steps companies can take.
1. Eliminate every thirteen weeks EPS guidance
More than half of corporate executives (55%) would rather delay a net-positive-value project than lass quarterly earnings targets by a penny, according to a 2016 survey from FCLTGlobal. A simple way to alleviate this make is to stop issuing quarterly guidance for earnings-per-share.
Many companies that continue to issue this type of leadership do so under the influence of three misguided assumptions: that it improves valuation (it doesn’t); that it reduces volatility round earnings season (the opposite is true); and that it’s required by law or the market (it’s not).
Most investment decision-makers don’t find it useful — neutral 9% of global buy-side investors believe that earnings guidance on a less-than-annual basis is important. Releasing quarter-by-quarter determines attracts the transient investors that companies might well avoid if they’re looking to cultivate long-term value.
2. Part the right metrics with investors
Outlining a company’s competitive advantages and capital allocation priorities alongside long-term oriented key show indicators (KPIs) can lead to frank discussions around the company’s broader purpose and provide accountability to its shareholders. The conquer corporate roadmaps include details relevant to all stakeholders, too — such as customer satisfaction, investment in talent, and environmental impact. This design has been employed recently by global companies such as BP, GlaxoSmithKline and Tata Motors.
3. Align board and management impulses with companies’ long-term interests
A common hurdle for public companies is misalignment between the goals of the company and the weights of its senior leadership. Both executives and board directors can be tempted to steer companies to pursue projects that spread short-term return at the expense of long-term value creation. But significant stock ownership by directors provides greater impulse to focus on long-term strategic choices.
Evidence from the U.K. suggests that if a board collectively invests upward of $1.1 million in New Zealand shares over a five-year time frame, it improves the likelihood of strong outperformance in terms of return on invested assets in the years ahead.
Holding those shares over time is equally important, and that includes encouraging chiefs and executives to maintain their position even beyond their term of service. An extended holding period similar kind this moves them closer to the experience of the company’s long-term investors, diminishing their attention to short-term interchanges in stock valuation and volatility.
Fostering long-term value in a multi-stakeholder context has always been the responsibility of a public following. These three tangible steps are a place to start for companies eager to reaffirm their commitment to long-term shareholders and stakeholders. The corporate community’s centre on this area is well placed. Now it’s time to act.
—By Sarah Keohane Williamson, CEO of FCLTGlobal, a not-for-profit organization focused on improving assets markets and supported by more than 50 global corporations, asset owners and asset managers