An emphasis on short-term financial results, also called short-termism, has so dominated the U.S. corporate landscape in recent years that some institutional investors are becoming frustrated. Among them is Larry Fink, the chief executive at BlackRock, the world’s largest investor, with $4.6 trillion in assets. Fink earlier this month sent a letter to the companies of the S&P 500 outlining the negative affects of short-termism on companies, the country, and the overall economy.
Short-termism is such a problem that a study by the National Bureau of Economic Research found that 80 percent of corporate executives were willing to forgo spending on research and development to avoid missing their own earnings estimates. The study also said that 55 percent of those surveyed would delay projects to avoid missing estimates. A study by Ernst & Young found that factors that contribute to short-termism include: new technologies, reduced trading times and transactional costs, increased market volatility, and media coverage.
Factors that contribute to short-termism include: new technologies, reduced trading times and transactional costs, increased market volatility, and media coverage.
The Ernst & Young report also found that short-termism is regularly reinforced by companies’ market communication and reporting practices. These practices often focus almost solely on short-term results. When this occurs, many investors are forced to look elsewhere to find the information they need to evaluate the company’s value creation potential. Among other things, this informational void could lead to destabilizing support for activist agendas.
Short-termism is regularly reinforced by companies’ market communication and reporting practices.
With that in mind, IR professions need to be sure they properly and proactively educate investors on their company’s long-term strategy, growth goals and appropriate metrics. Educational opportunities include:
The corporate website: In a given year, more investors will spend time on a company’s website than with the company’s management team. Therefore, the company’s long-term strategy could be given emphasis on the corporate website either on the investor relations landing page or via its own tab. Foot Locker for example devotes almost its entire corporate landing page to its strategic goals. Netflix has a ‘long view’ tab on its IR page.
The CEO annual report letter to shareholders: Regardless of the annual report format, investors read the letter to get a sense of where a company is now and, most importantly, where it’s going and how it will get there. Companies like Amazon make a point of using the shareholder letter to highlight its long-term strategy and famously CEO Jeff Bezo ends each letter with the line “because it’s still Day 1” to emphasize the company’s focus on the future.
Quarterly earnings reports: With the quarterly earnings reports and corresponding conference calls, a company has a unique opportunity to provide critical long-range strategic context to the quarterly outcomes. “With clearly communicated and understood long-term plans in place, quarterly earnings reports would be transformed from an instrument of incessant short-termism into a building block of long-term behavior,” the Ernst & Young study said.
Non-deal road show meetings and industry conferences: These meetings throughout the year offer the rare opportunity to have the largely undivided attention of investors. Rather than use this platform to review the company’s business lines and recent financial performance, companies would be better served using these presentations to provide a closer look at the distinct competitive advantages by end market and other drivers of future value creation.
Stand-alone capital allocation press releases: Few line items speak more to a company’s growth agenda than capital allocation. While its most typical that companies discuss capital allocation in their quarterly earnings releases, some companies are now drawing attention to long-term plans by issuing separate, annual or quarterly press releases outlining how capital will be allocated. General Motors did just that last year to emphasis its long-term goals including renewing a pledge to spend $9 billion in new technology.
As investors look more to the future, IR professionals would be well served to do the same or risk losing control of their message.