FCLT Global has breakfast in London
London 9th November - On the morning that the UK financial sector woke up to find that the people of the United States had picked a President Trump over a President Clinton, and as capital markets reacted to the shock election result, it was a fitting day to unveil to the UK the ‘Focusing Capital on the Long Term Global’ (FCLT Global) initiative.
The invitation-only event, sponsored by Kempen Capital Management, introduced the initiative which aims to explore new approaches to encourage long-term behaviours in business and investment decision-making.
The morning’s conversation looked to uncover the factors which contribute to short-termism in investment, from company behaviour and the actions of asset managers to the needs of asset owners – all of which are thought crucial in helping ease some of the current tensions between business and society.
Leading the panel discussion on how to tackle the rise in short-termism:
• Dominic Barton, Global Managing Partner at McKinsey’s, who discussed the factors driving short-termism
• Stefan Dunatov CIO of Coal Pension Trustees, who assessed long-term thinking from an investor perspective
• Lars Dijkstra, CIO of Kempen Capital Management, who ran through how stakeholders could incorporate a long-term view into investment
- The panel was moderated by Julian Samways, Managing Director of marketing and media relations specialist consultancy, JPES Partners
The speakers were joined by an audience of London-based asset owners, asset managers, corporates, other key stakeholders – including Lord Myners who has led a number of mandates in the City to improve corporate governance structures.
FCLT Global CEO Williamson said that while it is indeed human nature to think predominantly of the short-term and that it is wired into our DNA, ensuring that adequate measures are taken to help prevent short-term knee-jerk reactions is key to safe capital market engagement for all key stakeholders and will lead to value creation. Environment, social and corporate governance also relies heavily on industry players aiming for long-term targets, she said.
- As it stands, 87% of executives and directors feel most performance pressure over 2 years or less
- 99% of 2015 earnings for S&P 500 companies were spent on dividends and buybacks. In fact, dividends and buybacks have been steadily growing as a share of corporate earnings and have nearly reached 100%
- 55% of CFOs would delay net present value-positive projects to hit quarterly earnings targets. (CFOs would do that if they would even miss the target by 1 cent, Barton stressed).
- Executives and directors in developing markets report particularly marked increase in short-term pressure, 82% compared to North America (65%) and Europe (64%)
- Some sources of short-term pressure, like boards and economic uncertainty, have remained consistent while new sources, like activists, are even more prominent
- As a result of short-term pressure, executives use shorter time horizons for strategic planning than they believe they should
- 86% of executives agree that longer time horizons for business decisions would improve performance
Stefan Dunatov gave a candid investor perspective on the pressures and thinking behind strategy implementation, emphasising the care that needs to be taken when asset owners decide to in-source resourcing. He emphasised that firms need to ensure that they are not ‘creating internal asset-management functions that replicate asset managers but that do not fully reflect the asset owners’ needs or are not aligned to their objectives’.
Kempen Capital Management’s CIO Lars Dijkstra represented the asset management view on long-termism in equity investing, and underlined that the industry had to move away from their current mindset to one that focuses on ‘companies and not securities’. He also highlighted that the persistent conversation around ‘active versus passive’ is detracting from the real paradigm – asking whether passive managers are likely to engage in the long-term.
The panel as a whole addressed aspects such as the rise of a professional class of corporate bond members and the role of investment consultants in the investment chain.
Some of the salient questions which arose from the panel and audience debate:
- Would paying board members more and allowing them more time aid better capital allocation decisions?
- Can short-termism in the capital markets be fixed without fundamental structural change?
- Should the dialogue be more clear between asset owners and corporations?
- How much does the ‘Active versus Passive’ detract from the paradigm?
- Do passive managers want to engage in the long-term?
- Are current plans to cull short-term thinking radical enough?
- Why are so many new companies choosing to remain unlisted?
Lord Myners, who is an avid industry lobbyist, stated his support for the FCLT Global initiative, commending it for starting the conversation around short-termism, while also calling for more fundamental structural changes in order to drive the movement.
“People talk about aspects of change but when it comes to implementing it in their own organisations – it becomes a different thing,” added Kempen CIO Dijkstra, pointing to the need for action over rhetoric for key stakeholders in the industry.
While FCLT Global CEO Williamson ended the lively morning with the call for intellectual capital in the form of ideas and strategies no matter how ‘radical’. The ‘focus’ of FCLT Global is to deliver practical solutions through detailed research that encourages long-term behaviour in the investment and business world, to drive long-term value creation and economic growth.