Amsterdam,
18
July
2016
|
14:45
Europe/Amsterdam

INTERVIEW: Dominic Barton of McKinsey combats the short-term mindset

As co-author of the seminal article ‘Focusing Capital on the Long Term’ (with Mark Wiseman), Dominic Barton of McKinsey & Company triggered the long-term investing discussion that is (slowly) gaining traction in global finance. In this Q & A interview Dominic answers key questions regarding why – and how – the shift to longterm should be implemented.

In your opinion, what changes must be made in asset management in the near future?

‘Asset management has a critical role to play in reorienting the investment value chain toward long-term value creation. First, asset owners and managers must reorient their portfolios toward longer-term performance, looking to asset classes and investments, like infrastructure, that provide long-term value, but may take longer to see returns.To support these changes, asset managers should align compensation and performance measurement with these longer time horizons – such as GIC’s (investment corporation of the Government of Singapore) policy to evaluate manager bonuses on 5- and 10-year performance. Furthermore, new benchmarks have a role to play in encouraging asset managers to take a longer view and encourage companies to adopt and showcase sustained value creation plans. For example, the recent creation of the S&P Long Term Value Creation Index –and the strong interest in using the new benchmark – is a great step forward.Finally, asset managers must devote more time and resources to engagement with management teams and boards. There is no substitute for active investors who develop a deep understanding of businesses and promise support for long-term value creation. 64% of asset managers say their engagement with boards is increasing – and this is an encouraging sign.’

What has been your motivation in launching the Focusing Capital on the Long Term (FCLT) initiative?

‘Along with our partners, McKinsey helped to launch the FCLT initiative because we saw the growing costs of short-termism. I had spent over a decade living and working in East Asia, where corporate and investor timelines are far longer, and when I returned to living in London, I was surprised by how much pressure CEOs felt to demonstrate results in a matter of quarters. We saw that this was destroying economic value, diminishing shared prosperity among a broader set of stakeholders, and undermining trust in capitalism in the wake of the financial crisis.The initiative was launched – along with Mark Wiseman from the Canadian Pension Plan Investment Board, Larry Fink from BlackRock, Cyrus Mistry from Tata and Andrew Liveris from Dow – because we believed that the issue needed more public attention, more rigorous analysis, and concrete action plans to help investors, executives, and boards combat the growing short-term mindset.’

What is the role of Dutch institutional investors (pension funds) in the long-term debate?

‘The Netherlands has a proud tradition of leadership on long-term investing and incorporation of environmental, social and governance factors, and it is a hub of leading pension players. For example, ABP was recently ranked by the Asset Owner Disclosure Project as the 4th best institutional investor in the world at managing climate risk (and was by far the largest in terms of assets among the Top 10). Another good example is PGGM’s active engagement with the companies in its small-cap equities portfolio on long-term strategic topics. Institutional investors elsewhere in the world need to consider the relevance of these approaches to their own strategies.'

 

Dominic Barton, Global Managing Director of McKinsey & Company
At a systemic level, we can measure long-term investing by the proportion of cash flow and profits going back to investment (either in capital expenditure or R & D), and unfortunately these numbers seem to be falling
Dominic Barton, Global Managing Director of McKinsey & Company

How – and with what measurements – can you determine when long-term investing is a success?

‘Long-term investing is a notoriously difficult outcome to measure. However, there are several areas that are key indicators. First, and foremost, we can look to investment returns for managers over horizons and whether asset owners are meeting their most fundamental long-term objectives (e.g. can pension funds meet obligations without taking undue risk?). Similarly, we can look at corporations and boards’ dedication of time and resources to long-term strategy (e.g. how long are they spending on these topics?) and the tenor of corporate-investor dialogue (e.g. are analyst calls focused on minutiae over the next quarter or truly strategic issues?). Long-term health measures such as quality of talent pipeline, innovation rate, trust levels with key stakeholders, and resilience also need to be identified for each company.At a systemic level, we can measure long-term investing by the proportion of cash flow and profits going back to investment (either in capital expenditure or R & D), and unfortunately these numbers seem to be falling. Finally, we continue to conduct qualitative surveys of how much pressure managers feel to demonstrate short-term results, and what value sacrifices they are willing to make to meet short-term targets.’

What do you find particularly important and significant in such initiatives as FCLT and SHIFT TO?

‘I am impressed by the breadth of interest in these initiatives. Despite the geographic differences in business culture or regulation, we find that short-termism is of concern around the world. Unlike many business associations, these efforts have attracted an incredibly diverse set of stakeholders across geographies and industries– from mining to consumer products and from hedge funds to government officials.In addition, I believe the practical orientation of these efforts is unique. While we are interested in studying and diagnosing the issue, we have also worked collaboratively with members to create concrete action plans to pilot new approaches within investment funds, boards, and management teams. We hope that FCLT will continue to take this action-oriented approach as we grow!’

This article appeared in the Kempen Insight - July 2016

About Dominic Barton

Dominic Barton is the Global Managing Director of McKinsey & Company. In his 27 years with the firm, Barton has advised clients in a range of industries including banking, consumer goods, high tech and industrial. Dominic leads McKinsey’s work on the future of capitalism, long-term value-creation and the role of business leadership in society, and is the author of more than 80 articles on related topics. This includes the article ‘Focusing Capital on the Long Term’ (co-authored with Mark Wiseman) which appeared in the Harvard Business Review in January 2014, and which sparked the ongoing FCLT discussion. Dominic is a co-author, with Roberto Newell and Greg Wilson, of Dangerous Markets: Managing in Financial Crises (Wiley & Sons, 2002) and China Vignettes: An Inside Look at China (Talisman, 2007). Amongst his many board and advisory positions, Dominic is a member of the Canadian Prime Minister’s Advisory Committee on the Public Service, a Trustee of the Brookings Institution and a member of the Editorial Board of SHIFT TO.