Breaking the Short-Term Cycle
NIRI Cincinnati Tri State Chapter
Meeting date: Oct. 4, 2006
Topic: Breaking the Short-Term Cycle
Guest speaker: Matthew Orsagh, senior policy analyst at the CFA Centre for Financial Markets Integrity
Approximately 40 Chapter members and guests gathered at The Phoenix Restaurant Oct. 4 for a presentation on Breaking the Short-Term Cycle. Matthew Orsagh, senior policy analyst at the CFA Centre for Financial Markets Integrity, and an author of a white paper on the subject, was the keynote speaker.
Orsagh took the group through the history of the development of the paper, including NIRI's own surveys on short-term thinking in 2005 and 2006 and a 2005 symposium series co-sponsored by Orsagh's group and the Business Roundtable Institute for Corporate Ethics. The research and insights of thought leaders at the symposium confirmed that, as Orsagh's paper notes, "the obsession with short-term results by investors, asset management firms, and corporate managers collectively leads to the unintended consequences of destroying long-term value, decreasing market efficiency, reducing investment returns and impeding efforts to strengthen corporate governance."
To remedy the problem, the symposium panelists recommended that corporate leaders, asset managers, investors and analysts should:
- Reform earnings guidance practices. Ideally, that would mean ending the practice of providing quarterly earnings guidance. However, the group noted that some companies have strategic needs for providing such guidance. Panelists suggested those companies adopt practices that reflect overall long-term goals and strategy, and that they work to transition away from quarterly guidance over time. Panelists also urged corporate leaders to work toward providing higher-quality, long-term, fundamental guidance practices.
- Develop long-term incentives across the board, with compensation structured to achieve long-term strategic and value-creation goals. Panelists said executive incentives focus disproportionate on short-term objectives and suggested that this focus shift. They also recommended that stock ownership guidelines should require all executives and directors to hold a "meaningful" amount of equity in the company they serve. The goal would be to make it "economically material to the individual that a company succeed in the long term." The panelists went further to urge that asset manager compensation also be tied to long-term performance and long-term client interests.
- Demonstrate leadership in shifting the focus to long-term value creation. Panelists said companies should "embrace enhanced corporate reporting that concentrates on cash flow and a broad range of operating metrics." Additionally, panelists encouraged analysts, asset managers, institutional investors and pension fund managers to shift to a long-term focus and develop incentives accordingly.
- Improve communications transparency. Companies should help those in the financial community better understand the business. That means using clear communications in plain language and providing insight into long-term outlooks. It also means a better integration of investor relations and legal functions.
- Promote broad education of all market participants about the benefits of long-term thinking and the costs of short-term thinking.
In the discussion that followed the formal presentation, Orsagh said that while many companies were moving away from quarterly earnings guidance, some migrate back to the practice. He said it will take time to change the culture, and guests in the audience noted that even if companies do stop issuing guidance, it remains the primary measuring tool on the Street. Orsagh again noted that change takes time.
He said that in lieu of quarterly earnings guidance, some companies are finding success in providing multiyear targets on other metrics, such as run rates in certain lines of business, that force a longer-term look at the company's path.
Also at the Chapter meeting, immediate past President Susan Robinson presented current President Heather Wietzel with the award the local chapter won at the national NIRI meeting earlier this year. The Communications Award honored the Cincinnati Tri State Chapter for services that keep members informed and involved. Robinson also presented immediate past program Chair Wayne Buckhout with an Individual Leadership Award. NIRI National honored Buckhout for his longtime service in planning programs and for leadership in creating and implementing InvesTristate, Greater Cincinnati's first regional investment conference.