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June 01, 2007

Gore Takes the Long View

by Directorship Editors
Former Vice President Albert "Al" Gore, Jr., might for now be on the sidelines watching the current presidential race, but he's been as active as any candidate at airing his views in public. And, the Oscar winner has more than climate change on his mind. Directorship caught up with Gore at a gathering of the Council of Institutional Investors in Washington, D.C., where he displayed both humor and smarts on boards, investors, energy, asset managers, and sustainability. His mantra these days: long-term focus.

On Sustainability
"Sustainability is simply part of investing wisdom. Companies that once seemed to be doing extremely well are suffering declines in business activity because of the new environmental changes and exposures that have not been considered long-term issues. These factors raise serious questions about the board's fiduciary responsibility and how it needs to build sustainability factors into a longterm strategic approach."

Financial Reporting
"To a great extent, we measure only what we see. So the analytical and accounting tools bequeathed to us by history assume that our resources are limitless and as a result, are not being properly depreciated. Externalities such as water and air are simply not considered because they are not as visible. True sustainability is outside the boundaries of financial reporting today. For example, if you have employees in a developing country who need access to something as basic as water, the long-term sustainable factors are going to have a huge impact on your corporate health. If you take a blind eye to the larger picture, then you don't capture any of this."

Climate Change
"I believe this is the most serious challenge we've ever faced in our history. We are putting 70 million tons of CO2 into the atmosphere, and the oceans are changing in acidity in response to that pollution. The floating Arctic ice cap could be gone in as little as 30 to 100 years, and ... it won't return for millions of years."

Short-Term Asset Managers
"There is a very real problem and that is the pattern of equity portfolio investing in the market. Thirty years ago, the average holding period for equities was seven years, but now there's a 100-percent turnover in 11 months. If corporate finance teaches us that real value builds up over a cycle and a half, how is that sound investing? So how do we break free from this formula? Pension asset portfolio managers need to consider that their overall objective is to match their long-term liabilities with long-term assets. Over time, people will do what you pay them to do. If you pay them to maximize quarterly performance, human nature will do just that."

The Future
"Companies and the world around us desperately need incentives to take risks in favor of a longer-term equation that will position them to sustain performance. Companies and their boards need to embrace energy efficiency and become more conservation-minded. If they listen only to the market mantra of making quarterly projections, and place no incentives aimed at making their companies sustainable long term, what does that do on a macro basis to large pension portfolios, which have to fund long-term liabilities? We need to re-examine aggressively our models and incentives for performance. Investors and boards who want to do the right thing for the country, the economy, and their companies should be joining this call."
Tags: sustainability (1) financial reporting (2) short-term asset (1)
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