OPINION

Telling a long-term value story

There is an imperative for building long-term strategy into corporate-shareholder communications and providing guidance on how chief executives can go about that.

Existing corporate-shareholder communication is biased towards short-term horizons. Little time is spent addressing the future or providing forward-looking information.

Pressure on chief executives to deliver short-term results has intensified in recent years. CEOs that respond to these pressures by cutting back on research and development and losing sight of business fundamentals may damage long-term corporate performance.

As CECP Strategic Investor Initiative set out in our recent paper, this is a problem for corporations, their investors and the broader community of stakeholders. The evidence indicates that corporations that manage business-relevant sustainability issues and adopt long-term strategies outperform peer companies. Corporations focused on the long term also reduce the negative impact on the various systems (natural and financial) on which they rely. With better sustainability credentials, corporations are also better placed to protect their brand, innovate, operate a more resilient business model, and retain and motivate employees.

The major mutual fund managers – with a collective $11 trillion in assets under management (AUM) – agree that short-termism is a major problem, having raised concerns about “quarterly earnings hysteria” at the expense of “long-term value creation”.

And Vanguard chief executive Bill McNabb also made the case for a long-term focus in a recent open letter to directors of companies worldwide on responsible stewardship. There is broad agreement that the dialogue between corporations and their shareholders should be reoriented to address long-term value-creation. But how?

The CECP Strategic Investor Initiative’s response to this challenge is the CEO-Investor Forum – a new platform to enable chief executives of leading listed companies to present plans for long-term value creation to investors.

The inaugural CEO-Investor Forum was held in New York in February. Corporations with an aggregate market capitalisation of $600 billion presented long-term plans to investors representing AUM of $20 trillion.

The long-term plan presentations augment the existing schedule of corporate-shareholder communications. These plans can help reorient quarterly calls so they address long-term targets and meet investor expectations for improved disclosure aligned with long-term horizons. Investor-facing public disclosure of these long-term plans can also help attract more long-term “investor allies”, embed environmental, social and governance (ESG) principles in business models and give investors an understanding of the mega-trends relevant to a company (such as the transition to a low-carbon economy).

We think long-term plans should be a mainstream element in corporate-shareholder communications. To this end, the next CEO-Investor Forum will be held on Tuesday, September 19, at Bloomberg in New York – with further forums in New York and San Francisco next year.

 

Five tips for CEOs telling the long-term value creation story

 

Following the inaugural CEO-Investor Forum, we developed the following criteria (elaborated upon in our recent paper), in consultation with institutional investors, that chief executives should consider when putting together their long-term plan.

  1. Talk about the future: A long-term plan balances a long-term value creation story (about the past) and a long-term value creation plan (about the future). To fulfil the potential of a long-term plan, a chief executive should spend two-thirds of the presentation on forward-looking information.
  2. Have a five-year plan: corporations and investors have fundamentally aligned long-term investment horizons. A long-term plan should reflect this and present a plan, with appropriate measures, for five years forward.
  3. Mission-critical stakeholders: A corporation has many stakeholders but not all are critical to its long-term performance. Chief executives should demonstrate an awareness of the corporation’s “mission-critical” stakeholders and how they are managed.
  4. ESG: Financially material ESG factors are core to resilient corporate performance over the long-term. Through using frameworks as the Sustainable Accounting Standards Board and telling “ESG war stories”, a chief executive can help investors understand how a corporation manages its business-relevant ESG issues.
  5. Capital allocation and mega-trends: Long-term plans can rely on many strategies to generate growth, including acquisitions, divestments and organic growth. Unpacking that strategy and setting out how it is funded and aligned with mega-trends (like technological disruption), helps investors understand the future corporate context.

 

CECP’s Strategic Investor Initiative is an effort to shift trillions in investor assets to companies that adopt and communicate long-term strategies that integrate financially material ESG factors. The CEO-Investor Forum is a core element in that effort. The work of the Strategic Investor Initiative will be to deepen and broaden the practice of presenting long-term plans. Over time, we expect the pioneering corporations and CEOs presenting long-term plans at CEO-Investor Forums to reap the benefits of enhanced long-term returns and supportive investors with a long-term focus.

 

Mark Tulay is director, Tim Youmans is research director, and Brian Tomlinson is senior research adviser for the Strategic Investor Initiative at CECP.

If you are an investor and are interested in attending CEO-Investor Forums, please contact Mark Tulay for more information: [email protected]