A group of institutional investors that manage combined assets of
£170billion ($340bn) has issued a guidance note calling for an end to
the present preoccupation with short-term financial results.
The 36-page note from the Marathon Club, an international alliance of
trustees and senior executives in the institutional investment sector,
argues the short-term focus is, among other things, distracting
attention from the ‘key issue’ of corporate responsibility. It says
investors cannot monitor the ‘management of social and environmental
risks’ if they concentrate on monetary gains over periods as short as
three months.
The Marathon Club’s position is that ‘a series of short term
[investment] approaches is unlikely to generate the desired return’ for
pension funds and other institutional investors.
Although the number of companies reporting on a quarterly basis is now
falling in the US, the club argues that short-termism is still
widespread because trustees of pension funds are failing to monitor
their investment managers adequately. It recommends that pension fund
trustees ‘clearly articulate and explicitly record’ their investment
beliefs, set specific objectives for risk and return based on those
beliefs, and spell all this out to their advisers.
Among examples of investment beliefs cited in an appendix are that
‘short term performance reviews detract from long-term strategy’ and
the ‘strength of a sponsor’s covenant can allow a longer term deficit
recovery period, say 20 years.’
The selection of fund managers, says the statement, should be directly
linked to how a candidate matches those investment beliefs relating to
long-term performance. Incentive fees paid to the investment managers
should discourage a short-term outlook.
Peter Scales, chairman of the club and chief executive of the London
Pension Fund Authority, said: ‘Our recommendations are designed to
encourage trustees to state their beliefs explicitly in writing.
‘The change in mindset required is significant and will not be achieved
without the co-operation of all participants in the investment decision
chain – trustees, investment managers and investment advisers.’
The club’s view that the need for companies to satisfy analysts’
quarterly earnings expectations may ‘jeopardize long term growth
opportunities’ echoes a call by the US Chamber of Commerce for an end
to quarterly earnings guidance. Some US corporates, including
Citigroup, Coca-Cola, General Motors, Ford, Intel, Motorola and Pfizer,
have already decided to end quarterly reporting of financial results on
the grounds that it encourages short-termism (EP7, issue 11).
In Europe, the Dutch pharmaceuticals company DSM recently tried to
introduce a ‘loyalty dividend’, giving ten per cent extra annually to
shareholders who retain their holdings for at least three years. But
the move was successfully challenged in court by a US-based mutual
fund, Franklin Templeton Investments, and was dropped before it could
be voted on at DSM’s annual meeting.
