The Easter Bunny and Other Wish Fairies

I was having tea with the Easter Bunny the other day … Well, that’s how I felt after reading the CECP’s letter to CEOs urging for a more strategic, long-term presentation that integrates a discussion of social and environmental risk at their Strategic Investor Initiative (SII) Investor Forums.

Hallelujah, I initially thought.  An opportunity to talk about where we are going … the forces shaping how we get there … and the framework to manage risk, evolve and create value while on our journey.  I applaud the SII’s goal to shift the investor communications paradigm away from a relentless short-term focus.  Past Forums were attended by major institutions like Vanguard, BlackRock, Dimensional Fund Advisors, CalSTRS, NYCERs as well as Clearbridge, Neuberger Berman, Gabelli Funds and Starboard Value.  Presenting companies have included:  IBM, Humana, Aetna, Unilever, Merck, Johnson & Johnson and Medtronic.

Will this SII effort work? Time will tell, but it’s important to note that so far, the Forum has primarily attracted investors whom would likely own the presenting companies anyway, regardless.  Further, I suspect the Forum had no impact on investor outlook, did not attract new investors to the companies or result in a material change in investor positions.

The reality is most investors are under just as much pressure to deliver short-term returns for clients as CEOs are to create short-term value for shareholders.  Further, the factors that support a short-term focus (some of which are identified below) are pervasive.  I’m not sure there are any wish fairies who can change that.

Factors Supporting Short-Termism

Short Termism Slide

In the competition for capital, most companies need to adapt and respond to a market that will continue to focus on quarterly results and 1- to 2-year valuation time horizons. Recognizing this, the SII suggests “repositioning quarterly earnings performance guidance from the ‘finish line’ to the starting line.”  Essentially, in their view, quarterly earnings should become the “building blocks of longer-term plans and disclosure rather than the central focus.”

This is good advice.  While short-termism won’t go away, by consistently providing a longer-term perspective on the company’s framework for creating value and managing risk in a dynamic environment, you’ll be better positioned to earn investor patience as the company evolves and invests for the future.

So, as you get ready for your next quarterly earnings, think about:

  • How current initiatives, tactics and results are stepping stones moving the company closer to its long-term performance zone
  • How relevant trends related to customers, suppliers, competitors and/or operating environment shaped strategies and impacted results; How are these trends expected to evolve

Weave the answers to questions like these into your earnings materials.  It’s likely only a matter of repositioning some comments throughout.  It will take thought, but in long-term it may be worth it.

 

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.
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Tags: short-termism, institutional investors, CECP, Strategic Investor Initiative,

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