Asset owners must step up and “join the fight” to end the focus on short-term results by companies and investment firms. Four practical steps to make this happen are outlined by president and chief executive of the Canada Pension Plan Investment Board, Mark Wiseman, and global managing director of McKinsey, Dominic Barton, in the most recent edition of the Harvard Business Review.
In the article, titled “Focusing capital on the long term” the authors outline four “proven” practical steps for big investors to take:
1. Define long-term objectives and risk appetite, and invest accordingly
2. Practice engagement and active ownership
3. Demand long-term metrics from companies to inform investment decisions
4. Structure institutional governance to support a long-term outlook.
Institutional investors own 73 per cent of the top 1,000 companies in the US, up from 47 per cent in 1973, so they should have both the scale and the time horizon to focus on the long term, the article says.
Asset owners need to focus on encouraging the long term focus both internally, and with the external funds managers that manage their portfolio. This includes an innovative approach to compensation and fee structures, mandates and investment structures.
The article outlines some innovative approaches that CPPIB has been experimenting with including offering to lock up capital with public equity investors for three years or more, paying low base fees but higher performance fees if careful analysis can tie results to truly superior managerial skill (rather than luck), and deferring a significant portion of performance-based cash payments while a longer-term track record builds.
The Harvard Business Review article is available below