Vanguard chairman Bill McNabb recently stated that American public companies have been chasing short-term gains at the expense of long-term value for too long…
There’s been a debate in the United States since the 1930s over how CEOs should run public companies, and we’re in the middle of a shift in the conversation.
It’s over how a chief executive should balance creating short-term and long-term value — a decision that affects shareholders, employees, customers, and society at large. Since the ’80s, the idea that shareholders must be prioritized above all other constituents has led to what some see as a “short-termism” that ends up destroying sustainability for the sake of chasing quarterly earnings.
“For too long, companies have sacrificed long-term value creation to generate short-term results, which erodes the sustainability strategic investors seek,” wrote Vanguard chairman Bill McNabb in a letter from the Committee for Encouraging Corporate Philanthropy’s (CECP’s) Strategic Investor Initiative (SII), aimed not at philanthropy but what we at Business Insider call “Better Capitalism.”
He has some ideas on how to fix this.
McNabb is the SII’s co-chair, and he’s the lead author on a letter addressed to CEOs who attended the CECP’s third CEO Investor Forum in February. The letter addresses a crucial problem at the heart of the short-termism issue: a difference in expectations from the heads of public companies.
As PwC’s annual CEO survey from 2016 found, 73% of investment professionals, versus 16% of CEOs, believed companies existed to create value for shareholders.
At Business Insider’s panel at the World Economic Forum in Davos this year, PepsiCo CEO Indra Nooyi — who struggled with investor impatience with her long-term plan for six years before seeing transformative results — said, “If we don’t educate the investing community about asking the right questions of companies, we’re always going to be pushing water uphill.”
Renault-Nissan-Mitsubishi Alliance chairman Carlos Ghosn was also on the panel and agreed with Nooyi. He said that while creating value quarter to quarter is certainly important, he believed that it is unnecessarily difficult to spend time and resources on long-term plans due to investor pressure.
McNabb and the SII board agreed, and that’s why in their letter they presented seven questions CEOs of public companies should address in meetings with investors about long-term strategies:
“What are the key risk factors and mega trends (such as climate change) your business faces over the next three to seven years and how have these influenced corporate strategy?”
“How do you identify your financially material business issues and which frameworks do you use for reporting on these issues? How do these figure into your future strategy and capital allocation plans?”
“How do you describe your corporate purpose and how do you help your employees share your vision for the company’s role in society? How does this shape your long-term strategy? How does your future strategy act upon this purpose?”
“How do you manage your future human capital requirements over the long-term and how do you communicate your future human capital management to your investors?”
“What is the corporation’s framework/strategies for interacting with its shareholders and key stakeholders?”
“How will the composition of your board (today and in the future) help guide the company to its long-term strategic goals?”
“What is the role of the board in setting corporate strategy, setting incentives for and overseeing management? How does the corporation ensure a well-functioning and diverse board accountable to its key stakeholders?”