How can IROs generate more long-term investing in a world dominated by financial markets often geared to reward short-term investing?
We are pleased to share an extract from a valuable interview to Sarah Williamson, CEO of FCLT Global. Ms Williamson talks to IR Update about long term value, MiFID II, consensus earnings guidance.
JULY / AUGUST 2018 – IR UPDATE (niri.org), by AL RICKARD, CAE
Short termism. IR professionals and corporate management teams are constantly battling the tendency of many investors to buy or sell shares based on short-term quarterly earnings rather than long-term results. Companies thrive when investors are with them for the long-term, yet financial markets seemed geared to reward short-term results, exacerbating and perpetuating the status quo.
How can this problem be solved?
Focusing Capital on the Long Term began in 2013 as an initiative of the Canada Pension Plan Investment Board and McKinsey & Company. In 2016 together with BlackRock, The Dow Chemical Company, and Tata Sons, they founded FCLT Global, a not-for-profit organization that works to encourage a longer-term focus in business and investment decision-making by developing practical tools and approaches to support long term behaviors across the investment value chain.
IR UPDATE INTERVIEWED FCLT GLOBAL CEO
IR Update: The problem of the quarterly mind set among investors is a persistent problem. You have a goal to change the way capital markets work and create more productive strategic dialogue with investors. At the 2017 NIRI Senior Roundtable you talked about three constituencies you are trying to reach with this message. Who are they and what actions do they need to take?
Williamson: We’re talking about asset owners, asset managers, and corporations. Each of those groups would like to be long-term, but they often feel pressure from one of the other three. Corporations need to focus on the long-term shareholder, providing a strategic roadmap, and eliminating quarterly guidance. Asset managers need to focus on long-term performance and aligning their interests with those of with their clients. Asset owners need to engage with companies about long term value creation, hire managers who prioritize long-term value creation, and have a long-term mindset during the hiring process.
So rather than blaming another party, there’s opportunity for each of those three groups to ask, “How can we change our behavior to be longer-term and make this whole ecosystem work a little better?”
There is good evidence that long-term companies outperform short-term companies, and there is good evidence that long-term investors outperform short-term investors. So why isn’t everybody doing this? We all understand it makes sense to be longer-term and we all understand it creates more value over time – but how? We’re shaping our work around practical toolkits to help people answer that question.
IROs ARE CLEARLY ON THE FRONT LINES OF THESE PRESSURES.
It’s their role to explain the long-term strategy and the short-term metrics. The experienced IROs understand that their goal is to shape the conversation, not just deliver data.
If someone asks a detail-oriented question, the CEO can ask the CFO or IRO to answer that. They can make it clear that if someone wants the CEO’s attention they need to ask long term questions. Questions on short-term data can be answered offline. It’s really about anchoring the whole conversation to the long-term strategy.
IR Update: You have compared sell-side analysts to the news media in terms of their coverage, which sets the tone of short term and long-term conversations with investors and other constituencies. With the ongoing changes in the sell-side, what opportunities does that open up to shift the focus more to long-term coverage?
Williamson: There’s a lot of opportunity right now. For better or worse, MiFID II is the real catalyst. It’s an inflection point for research. MiFID II requires companies in Europe to unbundle their payments for research so they have to write a check for research, rather than bundling it with trading fees. It’s too hard to separate what’s happening in Europe from what’s happening in the United States or somewhere else, so the implications are not confined to Europe.
That creates a real opportunity to have deep research that is worth writing a check for. Some research is more media-like, which you can get from TV or a newspaper for free. So if a research group wants investors to write a significant check to pay them for those efforts, then obviously that needs to be much, much deeper and much more extensive than what clients can read in a newspaper.
I think that’s a great opportunity for quality research that has long-term insights into a country or really understands some disruptive technology. Research like this can answer questions such as, “How long is that going to take? How much of an impact is it really going to have? Who are the long-term winners and losers in a particular industry?” That insight is extremely valuable.
IR Update: How will the use of consensus earnings estimates and guidance evolve in the future? FCLT Global reported last year that the share of S&P 500 companies issuing quarterly guidance has declined from 36 percent in 2010 to 27.8 percent. Your organization also found that 75 percent of surveyed investors say companies should move away from quarterly guidance.
Williamson: There is no real benefit to providing quarterly guidance. The things that are typically thought to be advantages – such as reducing volatility or creating a valuation premium – don’t exist in our findings and there are real costs to providing quarterly guidance. These costs mainly have to do with the feedback loop that can encourage management teams to make short-term decisions – and attracting short-term shareholders. It’s clear that companies that provide short-term metrics tend to attract short-term shareholders. We’d love to see those guidance numbers go down to zero. We feel that new companies that go public should understand that they do not need to issue quarterly guidance. Sometimes there’s a misperception that they should do so, although many of the large and successful tech companies that have gone public recently have not done this.
Consensus numbers will evolve as research evolves, but quarterly guidance is something that a management team can control.
IR Update: Every company faces external factors beyond their control that affect their business. When one of these factors springs up – such as a hurricane that can disrupt manufacturing and the supply chain – how can IROs best position their advice to investors to weather these events? Also, how can IROs prepare investors in advance for these external events?
Williamson: This a really interesting question. Investors are very good at taking in new information and changing their minds. So if a company gets hit with a hurricane, or interest rates do something we didn’t expect, or somebody announces unexpected geo-political news – markets move. Oftentimes I see companies who are afraid to show that things have changed, and I think normally that fear is misplaced.
IR Update: What would you say to IROs about the potential they have to make a difference?
Williamson: IROs have a challenging job. They are on the front lines, interfacing internally with their company and externally with all types of different constituents, some of whom are long-term in nature, and some of whom are not.
The world of investor relations and research is changing very rapidly and changing differently around the world. So IROs are have tough jobs, but they’re also a really impactful jobs, because they can influence all of those things. They can influence how their executives spend their time, they can influence how their executives understand their shareholders, they can influence how their shareholders understand their company, they can diminish the attention paid to the short-term participants in the market. So they should understand that with a lot of these things, they’re really in the driver’s seat – and that’s a huge opportunity. Those who can do this well and help their company focus on long-term strategy and attract the long-term shareholders they deserve can really have a huge impact on their company. They have the ability to create long-term value for themselves, investors, employees, and other communities they serve.
