terça-feira, 31 de março de 2015
The cost of confusing shareholder value and short-term profit
The world economy needs bold investments: $57tn in the next 15 years on infrastructure alone, according to the McKinsey Global Institute. Yet, for a typical large road project in the US, it takes more than six years to get through permitting and construction — roughly the time it takes, on average, to build a profitable new line of business, according to our research.
Capitalism may be the greatest engine of prosperity ever devised. But it requires taking a long view to really deliver. Yet corporate leaders know all too well that any action that negatively affects income statements in the next few quarters risks bringing down the wrath of investors — even if it is likely to create more wealth over time. Far safer to ward off activist investors by buying back shares, using some of the $1.3tn in excess cash currently sitting on US corporate balance sheets.
We all pay the price for short-termism. Researchers at Stanford University have concluded that pressure to meet quarterly earnings targets may be reducing research and development spending, and cutting US growth by 0.1 percentage points a year. Others have found that privately held companies, free to take a longer-term approach, invest at almost 2.5 times the rate of publicly held counterparts in the same industries. This persistent lower investment rate among America’s biggest 350 listed companies may be reducing US growth by an additional 0.2 percentage points a year.
It need not be this way. The vast majority of capital ultimately belongs to individual savers who want it to grow over the decades. Pension and insurance funds could use their long investment horizons to profit from big countercyclical investments. But in many jurisdictions they are constrained; for instance, by requirements to book losses on assets when their market values fall, even if they have no intention of selling.
Much of the problem stems from the way the vast majority of asset owners pay the people who manage their money. On average, 74 per cent of remuneration is paid in cash, and tied to outperforming an annual stock market benchmark. The result is an obsession with next quarter’s earnings rather than the next 10 years’.
The best-run funds tie managers’ compensation to performance over much longer spells — 25 years, in one case. They assess performance against absolute return targets, or benchmarks that reflect long-term, risk-adjusted fundamentals . More funds should follow this approach.
The biggest financial rewards should be reserved for managers who deliver long-term value, not just a quick pop in the stock. And boards should make this clear. Many chief executives say their own boards are the biggest source of pressure to focus on the short term.
It should not take an activist hedge fund attack to prompt executives to lay out their strategy for long-term value creation. Holding them to their promises will require more focused metrics than quarterly earnings per share. For instance, a pharmaceutical company should consider tracking such things as: manufacturing quality; employee recruitment, development and retention; drug safety; and affordable pricing.
Creating value for shareholders is not the same as maximising short-term profits. Companies that confuse the two put both shareholder value and stakeholder interests at risk. At a recent gathering in New York of 120 leading investors and chief executives, guests agreed that corporate leaders and big investors must speak and act more boldly on behalf of greater long-term capitalism. Doing so will not quiet the noisy crowd clamouring for immediate results overnight. But it is the only place to start.
Dominic Barton and Mark Wiseman are managing director of McKinsey & Company and chief executive of the Canada Pension Plan Investment Board