[Mb-civic] IMPORTANT READ- It is essential that investors look to the long term - Ftimes

[Michael Butler]

FT.com     
 
Click Here to Print
      EMAIL THIS | Close
 
It is essential that investors look to the long term
>By Al Gore and David Blood
>Published: July 6 2005 19:47 | Last updated: July 6 2005 19:47
>>

As Abraham Maslow, the psychologist, once said: “If the only tool you have
is a hammer, you tend to see every problem as a nail.” This rings true of
the financial markets using short-term financial measures to drive all
investment decisions regardless of time ­period.

The recent speech by William Donaldson, the former Securities and Exchange
Commission chairman, to the CFA Institute, the financial analysts body, was
a wake-up call for the investment community to put an end to this trend: “I
hope that investors will begin to change, particularly when they see the
value of an investment in a company that is managed for the long term.”

Numerous studies show that most of a company’s value is determined by its
long-run performance. The best investors have understood this. And yet, the
majority of the investment community now act as though the long term simply
does not matter. The average mutual fund in America turns over 100 per cent
of its portfolio every 11 months and quarterly earning targets are an
obsession with research analysts.

In a recent paper by the US National Bureau of Economic Research, 78 per
cent of the financial executives surveyed said they would give up economic
value in exchange for smooth earnings, and 55 per cent of managers would not
initiate a project with a very positive return if it meant falling short of
consensus earnings.

This short-term orientation has significant negative repercussions for the
global economy ­ in essence, the market is short on long. If businesses are
forgoing value-creating investments to manage short-term earnings, this will
damage our economic vitality. A short-term perspective hinders innovation
and research and development, diminishes investment in human capital,
encourages financial gymnastics and discourages leadership.

How do we reverse this trend towards the dominance of short-termism? First,
the investment community must embrace genuine long-term thinking. This means
managing portfolios with an investment horizon of roughly five years, or
through a business cycle. To do this, portfolio managers and analysts need
to take account of factors that are not routinely monetised on balance
sheets ­ including sustainability issues ­ as opposed to solely focusing
on short-term returns. This means analysing the implications for shareholder
value of long-term economic, environmental and social challenges. They
include future political or regulatory risks, the alignment of management
and board with long-term company value, quality of human resources
management, risks associated with governance structure, the environment,
restructurings/
>mergers and acquisitions, branding, corporate ethics and stakeholder relations.

Second, management must move away from the obsessive focus on meeting
quarterly earnings per share targets and instead concentrate on what
McKinsey, the consultancy, refers to as the “healthy company”.

Third, the research community must address long-term issues. These
extra-financial matters provide an opportunity for the sell side to
differentiate itself and add value. In support of this trend, The Enhanced
Analytics Initiative (EAI), a consortium of fund managers and asset owners,
encourages sell-side research into important extra-financial issues.
Furthermore, many executives are keen to have their shareholders aligned
with their long-term thinking and are increasingly communicating their
value-creation strategies to Wall Street and the City.

Capital markets and capitalism are at a critical juncture. The domination of
short-termism will stifle innovation, damage our economies, further impair
our pension systems and ultimately erode our standard of living. We are not
against hedge funds; they have a role to play in capital markets. However,
the long-term investment community, which represents the majority of total
investable assets, must adopt truly long-term thinking. Company management
and the research community must also look to the long term. Our livelihoods
and those of our children and grandchildren depend on it.

Al Gore is former vice-president of the US and chairman of Generation
Investment Management. David Blood is the former chief executive of Goldman
Sachs Asset Management and the managing partner of Generation Investment
­Management
>
>
>
 
 
 
Find this article at:
http://news.ft.com/cms/s/ceb75988-ee46-11d9-98e5-00000e2511c8,ft_acl=_ftaler
t_ftarc_ftcol_ftfre_ftindsum_ftmywap_ftprem_ftspecial_ftsurvey_ftworldsub_ft
ym_ftymarc_ic_ipadmintool_nbe_poapp_printedn_psapp_reg,s01=1.html
 
Click Here to Print
     EMAIL THIS | Close
 Check the box to include the list of links referenced in the article.