Promoting long-term wealth can be difficult if money managers, mutual funds, and hedge funds, who focus primarily on short-term gains, influence the strength of capital markets. The Aspen Institute and 28 leaders representing business, investment, government, academia, and labor joined together to end value-destroying short-termism.
“Short-termism must be addressed as a conceptual whole — piecemeal approaches do not work,” said Judith Samuelson, executive director of the Aspen Institute’s Business & Society Program. “Now is the time for bold ideas to drive change in the incentives and behaviors critical to transformation of how value is created and sustained.”
Institutional investors have a louder voice and corporate governance experts are asking that they promote investment policies that will promote long-term health of capital markets and public policies that encourage business managers and boards to focus on sustainable value instead of short-term, short-lived gains.
Some short-termism problems:
- First, high rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.
- Second, fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term.Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures.
- Third, the focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors. This, in turn, may put a corporation’s future at risk.
Shareholder power is likely to grow as Securities Exchange Commission Chairman Mary Schapiro continually calls for greater transparency between shareholders and their boards/management teams.
Signatories to the statement: “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management,” include:
John C. Bogle, founder, The Vanguard Group
Warren E. Buffett, CEO, Berkshire Hathaway
James S. Crown, president, Henry Crown and Company
Lester Crown, chairman, Henry Crown and Company
Steven A. Denning, chairman, General Atlantic
Jack Ehnes, CEO, CalSTRS
J. Michael Farren, former general counsel and corporate secretary, Xerox
Margaret M. Foran, governance expert
Barbara Hackman Franklin, chairman, National Association of Corporate Directors and former United States Secretary of Commerce
Bill George, professor of management practice at the Harvard Business School and former chairman and CEO, Medtronic
Louis V. Gerstner, Jr, retired chairman and CEO, IBM
David H. Langstaff, founder and former CEO, Veridian
Martin Lipton, partner, Wachtell, Lipton, Rosen & Katz
Jay W. Lorsch, Louis Kirstein Professor of Human Relations at the Harvard Business School
Ira Millstein, senior associate dean for corporate governance, Yale School of Management and senior partner, Weil, Gotshal & Manges
John F. Olson, senior partner, Gibson, Dunn & Crutcher and distinguished visitor from practice, Georgetown University Law Center
Peter G. Peterson, chairman and founder, Peter G. Peterson Foundation
James E. Rogers, chairman, president, and CEO, Duke Energy
Felix G. Rohatyn, former U.S. Ambassador to France
Charles O. Rossotti, former United States Commissioner of Internal Revenue; co-founder and former chairman and CEO, American Management Systems
Judith Samuelson, executive director, The Aspen Institute Business & Society Program
Henry Schacht, former CEO, Cummins and Lucent Technologies
Lynn A. Stout, Paul Hastings Professor of Corporate and Securities Law, UCLA School of Law
Richard L. Trumka, secretary-treasurer, AFL-CIO
John C. Whitehead, former chairman, Goldman Sachs
John C. Wilcox, chairman, Sodali and former head of corporate governance, TIAA-CREF
Ash Williams, executive director and CIO, Florida State Board of Administration
James D. Wolfensohn, ninth president, World Bank Group