Big asset owners intensify pressure for short-term results

Source : HBR, Jan-Feb 2014, p.47
Author : Dominic Barton & Mark Wiseman

Short-termism is undermining the ability of companies to invest and grow, and those missed investments, in turn, have far-reaching consequences, including slower GDP growth, higher unemployment, and lower return no investment for savers.

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The world’s largest asset owners include pension funds, insurance firms, sovereign wealth funds, and mutual funds (which collect individual investors’ money directly or through products like 401(k) plans). They invest on behalf of long-term savers, taxpayers, and investors. In many cases their fiduciary responsibilities to their clients stretch over generations. Today they own 73% of the top 1,000 companies in the U.S., versus 47% in 1973. So they should have both the scale and the time horizon to focus capital on the long term.

But too many of these major players are not taking a long-term approach in public markets. They are failing to engage with corporate leaders to shape the company’s long-range course. They are using short-term investment strategies designed to track closely with benchmark indexes like the MSCI World Index. And they are letting their investment consultants pick external asset managers who focus mostly on short-term returns. To put it bluntly, they are not acting like owners.

The result has been that asset managers with a short-term focus are increasingly setting prices in public markets. They take a narrow view of a stock’s value that is unlikely to lead to efficient pricing and collectively leads to herd behavior, excess volatility, and bubbles. This, in turn, results in corporate boards and management making suboptimal decisions for creating long-term value.