Tag Archives: short-termism

Just as the U.S. seeks to roll back regulations, the European Parliament adopts new corporate governance rules

by Cydney Posner

Just when the U.S. is looking at how to roll back its regulations on corporations (among others) (see, e.g., this PubCo postthis PubCo post and this PubCo post), the rest of the world seems to be headed in the opposite direction.  On Tuesday, the EU Parliament approved a Shareholder Rights Directive, which introduces, among other things, the concept of binding say-on-pay votes for companies listed in EU markets (over 8,000 of them). The Directive also includes some interesting measures intended to impede short-termism.  According to the press release fact sheet issued by the European Commission, the Directive must still be adopted by the European Council (expected shortly) and, assuming adoption, will become effective two years thereafter. Continue reading

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BlackRock sets its priorities for board engagement

by Cydney Posner

Asset management firm BlackRock (reportedly the largest, with $5.1 trillion under management) has identified its “Investment Stewardship” priorities for 2017-2018, intended to help companies prepare for engaging with BlackRock. Among the hot topics are governance (including board composition and diversity), corporate strategy for long-term value creation in light of shifting assumptions, executive pay linked to long-term strategy, climate risk disclosure and human capital management.  According to BlackRock, its engagement process is designed to be constructive, and its goal is “to build mutual understanding and ask probing questions, not to tell companies what to do. Where we believe a company’s business or governance practices fall short, we explain our concerns and expectations, and then allow time for a considered response.” However, Blackrock’s approach is not limited to engagement; although, as a long-term investor, the firm will be “patient” as companies work to address concerns, in the absence of progress, BlackRock “will not hesitate to exercise our right to vote against management recommendations.” Continue reading

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SEC committee discusses multi-class common with unequal voting rights

by Cydney Posner

An interesting topic of discussion at a meeting last week of the SEC’s Investor Advisory Committee was “unequal voting rights of common stock” — the trend over the last decade (plus) for a small number of IPO companies, particularly tech companies, to offer low-vote or, more recently, no-vote common shares to the public. (Of course, the concept of dual class common with unequal voting rights is not novel at all.  Many companies, particularly some that are family run, have in decades past had a class of common shares with 10:1 voting rights, not to mention the highly respected Berkshire Hathaway with a class holding voting rights of 10,000:1.)  The debate centered around whether these measures are a legitimate effort to protect companies from the pressures of short-termism exerted by hedge fund activists or are a mechanism that causes shareholders to cede power without providing accountability.  Of course, the answer depends on where you sit. Continue reading

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McKinsey study suggests alliances with sophisticated long-term investors can help blunt corrosive effects of short-termism

by Cydney Posner

In this study, consulting firm McKinsey raises the question of why so many companies seem to be ensorcelled by their short-term investors, which own only about 25% of the shares of U.S. companies, while failing to address — or perhaps even understand — the needs of their long-term holders, which own 75% of U.S. shares. While it’s true that short-term investors probably make the most noise, that noise, McKinsey contends, may be distracting managements from aligning with the types of investors that will have the greatest influence on share price over the long term.  Perhaps some of the pressures to emphasize short-term financial performance could be avoided or at least mitigated by building alliances with sophisticated long-term investors? Continue reading

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BlackRock CEO’s annual letter asks companies to address impact of changes in global environment

by Cydney Posner

This year, in his annual letter to corporate CEOs, Laurence D. Fink, CEO of asset manager BlackRock, challenges companies to address the impact of significant political, economic, societal and technological changes on their current strategies for long-term value creation: “As BlackRock engages with your company this year, we will be looking to see how your strategic framework reflects and recognizes the impact of the past year’s changes in the global environment. How have these changes impacted your strategy and how do you plan to pivot, if necessary, in light of the new world in which you are operating?”

What are these changes?  To Fink, dramatic changes — such as Brexit, global upheaval and the new administration in the U.S. — could affect assumptions underlying many companies’ long-term strategic plans, such as plans for continued international expansion.  At “the root of many of these changes,” he contends, is the “growing backlash against the impact globalization and technological change are having on many workers and communities.” Although he continues to believe that, on balance, globalization provides benefits, “there is little doubt that globalization’s benefits have been shared unequally, disproportionately benefitting more highly skilled workers, especially those in urban areas.” In addition, technology, while creating new jobs for highly skilled employees, is eliminating millions of jobs for other workers, many of whom face “retirement with inadequate savings, in part because the burden for retirement savings increasingly has shifted from employers to employees.” The political and economic consequences of these dynamics, he asserts, “impact virtually every global company.” Continue reading

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KPMG surveys audit committee concerns

by Cydney Posner

What are audit committee members’ greatest concerns? Audit committee members participating in KPMG’s 2017 Global Audit Committee Pulse Survey identified risk management as the biggest challenge for audit committees in 2017, with 42% of those surveyed characterizing their existing risk management programs as requiring “substantial work,” and a “similar percentage” indicating that it is “increasingly difficult to oversee those major risks.” However, only 51% indicated that they have the time to oversee major risks effectively and only 46% say they have the expertise.  Moreover, 39 % say it is increasingly difficult to find the necessary time and 43% say the same with regard to the necessary expertise. Also high on the list of challenges were legal/regulatory compliance, cybersecurity risk, the control environment in the extended organization and tone at the top. Continue reading

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Is there a fix for short-termism?

by Cydney Posner

Much has been written about the problems associated with the prevalence of short-term thinking in corporate America.  As noted in a post from The Harvard Law School Forum on Corporate Governance and Financial Regulation, a recent academic study revealed that “three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report.”  (See this PubCo post and this article in The Atlantic.)  Apparently, they weren’t kidding. Data compiled by S&P and Bloomberg shows that companies in the S&P 500 spent 95% of their earnings on repurchases and dividends in 2014, including spending $553 billion on stock buybacks (which can drive increases in EPS), leaving little for alternative uses of capital, such as long-term strategic investment in productive assets, including investment in R&D. (See this PubCo post.) As observed by Professor John Coffee in this post, “[p]resumably, it is self-evident that if an economy cuts back drastically on its investment in ‘R&D,’ it will experience less innovation and technological advances in the future…. That should be a cause for concern.” (See this PubCo post.)

The question is: is there a fix for this scourge? The American Prosperity Project, sponsored by the Aspen Institute, has some ideas. Continue reading

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