Tag: short-termism

Is there a business case for ESG?

Do companies that ignore long-term environmental or social costs in the pursuit of near-term profits pay another price in foregoing potentially long-term sustainable profit opportunities? The Business Case for ESG, from the Rock Center for Corporate Governance at Stanford University, authored by Stanford academics and representatives of ValueAct Capital, considers a framework for incorporating sustainability or ESG (environmental, social and governance) factors into corporate strategy and decision-making.  The prevailing theory is that the failure to take sustainability into account is a component of short-termism, “leading to decisions that increase near-term reported profits at the expense of the long-term sustainability of those profits. The costs of those decisions are assumed to manifest themselves as externalities borne by members of the workforce or society at large.” The paper cites investors like Laurence Fink of BlackRock and innovative approaches like The New Paradigm as examples of efforts to encourage companies to take into account stakeholders other than solely shareholders. The paper suggests that, properly analyzed, sustainability can affect not only externalities, but can also benefit the business itself—there is a business case for ESG.

The LTSE has just been approved as an exchange—will it make a difference?

Many have recently lamented the decline in the number of IPOs and public companies generally (about half the number since the boom in 1996), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.)  In response, some companies are exploring different approaches to going public, leading to a resurgence in SPACs and the launch of IPOs as “direct listings,” which avoid the underwritten IPO process altogether.   At the same time, companies are seeking ways to address some of the perceived drawbacks associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches.  Even the SEC is currently planning a roundtable to address the causes of and potential solutions to short-termism. (See this PubCo post.) Changing dynamics are not, however, limited to the IPO process itself.  And one of the most interesting concepts designed to address these issues on completely different turf was just approved by the SEC this month—a novel concept for a stock exchange located in San Francisco, the Long-Term Stock Exchange.  The concept has been in the works for a couple of years now and is backed by some heavy-hitting investors.  According to the LTSE’s founder and CEO, the “IPO is like a wedding. The IPO process is, what kind of wedding planner do you hire? What kind of wedding do you want to have? But being a public company is you’re now married to the public markets for the rest of your life. People have mostly focused on the IPO process — it’s like making the wedding more efficient….That’s not the problem. The problem is we have to live like this forever.”  How will the new Exchange seek to improve this “married life” going forward?

Coming this summer: SEC roundtable on the impact of short-termism

Yesterday, SEC Chair Jay Clayton announced that the SEC will be holding a roundtable this summer to discuss “the impact of short-termism on our capital markets and whether our reporting system, or other aspects of our regulations, should be modified to address these concerns…. The SEC staff roundtable will seek to explore the causes of short-termism and to facilitate conversations on what market-based initiatives and regulatory changes could foster a longer-term performance perspective in American companies.” In his statement, Clayton observed that, in light of increases in life expectancy, together with the greater responsibility of “Main Street investors” for their own retirements—largely as a result of the shift from the security of company pensions to 401(k)s and IRAs—the needs of these investors have changed: “Main Street investors are more than ever focused on long-term results.” However,  from time to time, they also “need liquidity. In other words, at some point, long-term investors do become sellers. The SEC’s disclosure rules should reflect and foster these needs—long-term perspective and liquidity when needed.” To that end, the goal of the roundtable is not just to discuss the problems associated with short-termism, but also to promote “further dialogue on the causes of and potential solutions to the issue.”

CII defends quarterly reporting

In December 2018, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” According to the press release, the request for comment solicits “public input on how the Commission can reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections.  In addition, the Commission is seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants.”  (See this PubCo post.) At the end of March, the influential Council of Institutional Investors submitted its comments in response to the SEC request.

Should we get rid of EPS?

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, an 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, that was no joke. As reported in Forbes, for the first six months of 2018, companies in the S&P 500 spent $367 billion on stock buybacks—which can drive increases in quarterly EPS without increasing the underlying long-term economic value of the company—while capex totaled only $317 billion.  ls there a way to engineer a course correction?

The impact of short-term pressures on long-term decision-making

In this article in the WSJ and this article in the New Yorker, the authors discuss the challenges companies encounter when they try to make long-term investment decisions in the face of short-term market pressures: the debate between short-term and long-term thinking on Wall Street “is a key concern for chief executives trying to justify major capital investments that can take years to pay off. Long-range strategies can be hard to pull off in an era when Wall Street is fixated on three-month reporting periods.” Should companies try to please long-term investors or investors who are “playing the quarterly game?” What about hedge-fund activists that threaten to force the company to adopt a short-term perspective?

CII petitions NYSE and Nasdaq regarding multi-class share structures

The Council of Institutional Investors has announced that it has filed petitions with the NYSE and Nasdaq requesting that each exchange amend its listing standards to address the issue of multi-class capital structures (i.e., share structures that have unequal voting rights for different classes of common stock).  As requested by the petition, the amendment would require that, going forward, companies seeking to list with multi-class share structures include provisions in their governing documents that would sunset the unequal voting at seven years following an IPO and return the structure to “one-share, one-vote” structures, “subject to extension by additional terms of no more than seven years each, by vote of a majority of outstanding shares of each share class, voting separately, on a one-share, one-vote basis.” According to CII, unequal voting rights impair the ability of shareholders “to hold executives and directors accountable.” But companies contend that these measures are being adopted for a valid reason: to protect the company from unwanted interventions by hedge-fund activists with short-term goals and perspectives. Accordingly, the debate has centered around whether these measures are a legitimate effort to protect companies from the pressures of short-termism exerted by hedge-fund activists and others or are a mechanism that causes shareholders to cede power without providing accountability.  Of course, the answer depends on where you sit.