The case for long-termism

Keith Ambachtsheer’s lead article in the Fall 2014 edition of the Rotman International Journal of Pension Management, takes readers through an historical and logical journey that supports the case for long-termism. Importantly he validates this with four high-profile investor case studies which demonstrate that a long-term view benefits society but also the investors, willing to practice it, in the form of higher returns.

In his article, The Case for Long-Termism, Ambachtsheer examines the historical journey of how mankind has shifted from subsistence societies to wealthier, more stable ones, arguing we are not there yet – there is still a higher plateau of civilisation to aspire to.

“Without long-termism we would still be living in the same subsistence societies our forebears did, continually on the edge of starvation,” he says.

“Surely it was our discovery of the wealth-creating logic of shifting from a mindset of day-to-day survival to one that stretched out to next week, next month, next year.. .and eventually out decades and even centuries. It was this shift towards being able to think and invest in ever longer time frames that made possible the eventual transformation of the subsistence societies of long ago to today’s far wealthier, more stable ones.”

The article goes on to address the fact that today’s societies are far more complex than the societies of long ago and because of this complexity, agents dominate in politics, corporations and finance. And in this world long-termism is not the dominant investment paradigm.

The principal/agent asymmetric information problem is not new in finance, with Ambachtsheer pointing out that Adam Smith addressed its existence in the “first opus on capitalism The Wealth of Nations”. But nor is it going away, and as such needs to be addressed.

Recent academic and practitioner writings on the problem, Ambachtsheer says, conclude that agents too often make business and investment decisions that favour their own short-term interests today, and that principals, or the fiduciaries acting on their behalf, must become more pro-active in fostering decisions that focus on longer-term value creation in their investments.

Part of the solution may lie in insisting that the representatives of asset owners become true fiduciaries, legally required to act in the sole best interest of the people to whom they owe a fiduciary duty.

“The resulting message to the governing boards of pension and other long-horizon organisations.. .is that they must stretch out the time horizon in which they frame their duties, as well as recognising the interconnected impact of their decisions on multiple constituents to whom they owe loyalty.”

Ambachtsheer’s call to action is that the “logical implication of these developments is that the individual and collective actions of the world’s leading pension funds are our best hope to transform investing into more functional, wealth-creating processes”.

The second part of his article gives four different and equally persuasive case studies – John Maynard Keynes managing the Kings College endowment, Warren Buffett’s Berkshire Hathaway, MFS Investment Management, and Ontario Teachers Pension Plan.

Each of the case studies is worth a read, so I won’t ruin it by trying to summarise, however the common threads through each are worth highlighting. For one, they see being out of step with the short-term mainstream as not only acceptable but a competitive advantage.

With MFS and OTPP, Ambachtsheer identifies three further common threads:

1. Autonomy to act: the organisation does not have to compromise its long-term strategies to serve multiple master with short-term mindsets
2. Governance and management quality: the organisation’s board can ask the right, hard questions, and its senior executives have good answers to them; both groups are committed to creating long-term value for their beneficiaries/clients.
3. Human capital: attracting and retaining people committed to executing long-term investment strategies is the organisations number one success driver. This means thinking hard about selection processes, using long-term incentive structures, and creating a collaborative culture and working environment.

For those that see the benefits of long-termism, and need a path to fruition, that says it all.

For the full article click here