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Long-termism is a hot topic in our profession. It has become the rallying cry of initiatives like Focusing Capital on the Long Term, which recently released a collection of essays by industry leaders, and the United Nations Principles for Responsible Investment (PRI); it’s also been the focus of efforts by the Organization for Economic Co-Operation and Development (OECD) encouraging infrastructure investing. Meanwhile, short-termism has been criticized by a number of prominent investment figures, including Larry Fink of BlackRock, who warned against it in a letter he sent to the heads of all S&P 500 companies in April.
CFA Institute has been considering this topic for years, developing resources such as the “Visionary Board Leadership: Stewardship for the Long Term” report, which discusses how corporate boards can think more strategically. The Future of Finance Advisory Council, comprising a diverse group of experts from finance, education, and media, has considered ways to make the financial system more resilient and sustainable over the long term.
The dialogue is now extending to a new era of fiduciary capitalism that emphasizes the role large asset owners can have — using their longer time horizon to choose investments that will provide long-term value for their beneficiaries and also have greater positive impact on society.
At the 68th CFA Institute Annual Conference, a panel of experts convened to explore how investment organizations can surmount obstacles to long-termism and to discuss why institutional investors must step up to change behavior in financial markets and the broader economy. Moderated by Roger Urwin of Towers Watson, the panel also featured Andrew Sheng, former central banker and chairman of the Securities & Futures Commission of Hong Kong; Keith P. Ambachtsheer of the International Centre for Pension Management; and Leo de Bever, formerly of Alberta Investment Management Corporation and the Ontario Teachers’ Pension Plan.
After the discussion concluded, a conference delegate said to me with enthusiasm: “Now this is what I expect from CFA Institute. This was wisdom that I could not get from reading a book at home.” Each panelist brought their own insights to the complicated issue of balancing long-term expectations for results against short-term demands for accountability.
Urwin pointed out that “this is about an undue preoccupation on the short term and paying too much for it . . . decisions need to be made with a long-term view for stakeholder benefit.”
— Will Goodhart (@WillGoodhart) April 28, 2015
An ownership mentality by investors should reduce the focus on quarterly earnings. As Sheng noted, we should be investing in the signal versus trading on the noise.
— Mark Harrison, CFA (@Mark_A_Harrison) April 28, 2015
Ambachtsheer, who has worked with pension funds for decades, says that “we need to re-think how we create boards.”
#futurefinance It is our fiduciary duty to think intergenerationally – Keith Ambachtsheer
— Emily Burt (@BurtEmilyA) April 28, 2015
We must encourage “new ways to deploy cash and patience,” said de Bever. “You cannot be extraordinary without trying new things.”
Leo de Bever: You need Boards to support innovation and back management and resist reputation risk #FutureFinance
— Simon Holman (@Simon_Holman) April 28, 2015
Asset managers have an opportunity to deepen their relationships with large funds by designing products that better align with their objectives. They can also stand out by better understanding investors and demonstrating integrity. One of the most popular quotes of the conference came from Sheng:
— CFA Institute® (@CFAinstitute) April 28, 2015
At a time when trust in the financial industry is still weak, it is especially hard to ask for a longer time horizon for accountability. The influence of career risk looms heavy for financial professionals, and boards fear reputational risk — with legitimate concerns that four quarters of underperformance will simply not be tolerated.
As Urwin summarized, a shift toward a culture of building longer term value requires courage and leadership. It is an opportunity for our profession to generate greater returns — if we are willing to seize it.
If you would like to know more about environmental, social, and governance (ESG) issues in sustainable, responsible, and impact (SRI) investing, please take the free eLearning course by CFA Institute: ESG-100: A Clear and Simple Introduction to ESG Issues in Sustainable, Responsible, and Impact (SRI) Investing.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: W. Scott Mitchell