The juxtaposition of long summer days against concerns over short-termism seemed to be a key theme in summer 2018. It started in June with the Business Roundtable urging companies to end quarterly earnings guidance. Then in August, we had a two-fer: Senator Elizabeth Warren (D-MA) introduced The Accountable Capitalism Act and President Trump tweeted the idea of changing from quarterly to semi-annual earnings reporting.
What all these had in common was a concern the short-termism prevalent in today’s market is detrimental to the long-term health of companies and economy overall. And each, in their way, proposed changes or actions to counteract those forces. I too am concerned about short-termism, but question why so many seem to think that its companies that need to change to alleviate the problem – it all about companies needing to start doing this or stop doing that.
Maybe I’m missing something, but I rarely hear suggestions on how investors or other financial market participants need to change. Let’s face it, there’s a significant number of financial market participants who are not long-term focused – think some hedge funds as well as high frequency and risk management traders.
On any given day, these short-term focused market participants can dominate market volume thanks to easy access to information, technology that speeds decision-making and execution, and low transactions costs. As Tim Quast of Modern IR noted, “when some machine can hammer every bid or offer and immediately cancel the order and reprice your stock 8% lower with a one-share trade. It’s absurd. We are failing to understand what the real malady of markets is – and it’s much more about structure than story.”
In my view, the majority of public companies are long-term oriented but in the competition for capital they need to deal with the reality of a market focused on quarterly results and the daily news flow. So, what’s a company to do? Well, don’t give up. Many of your permanent and long-term investors want to hear about your strategies for the future. One great idea comes from the Strategic Investor Forum which suggests companies treat quarterly earnings as “building blocks of longer-term plans and disclosure rather than the central focus.” You can also review the 2017 Focusing Capital on the Long Term (FCLT) report for thoughts on how to shift the investor dialogue to a more long-term perspective.
While short-termism won’t go away any time soon, 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 and plan for the future.
Lead-IR Advisors, Inc.
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