As part of our initiative to help shift capital markets to a more long-term focus, earlier this month we helped pull together a one-day summit in New York. The event drew 120 chairmen and chief executives, chief investment officers, and government leaders. I cochaired the summit alongside Mark Wiseman (president and CEO of the Canada Pension Plan Investment Board, one of the largest pension funds in the world) and Larry Fink (chairman and CEO of BlackRock, the world's largest asset manager.)
I'll say more about the event in a moment, but first, some background may be helpful. The road to the summit began six years ago, when I moved from Asia to London. I was amazed by the different pressures faced by CEOs in each region. To oversimplify, Western European and North American CEOs appeared to be much more pressured (and measured) by quarterly earnings-per-share performance, while their Asian counterparts appeared to be focused (and measured) more on the value and prosperity they generated over the course of a decade or more. There are clear exceptions in both regions, but the sentiment was clear. Concerned about the impact that excessive focus on quarterly earnings was having on trust in capitalism as a whole, I wrote "Capitalism for the long term," which was published in the March 2011 issue of the Harvard Business Review.
Quite rightly, a number of CEOs (Mark Wiseman and Larry Fink among them) responded that while they agreed there was a problem, what was really needed was an effort to come up with possible solutions. We started working together on developing a rigorous research base, identifying changes we could encourage within our own organizations, and mobilizing a group of business leaders to join us.
Our joint research made clear that companies and investors need to balance long-term goals with disciplined short-term action. For example, it took many successful multinational consumer-goods companies between 7 and 11 years to become profitable in China; and 70 to 90 percent of the net present value of the average public company sits in cash flows expected more than three years out. The problem is that our capital markets and corporate boardrooms are excessively focused on the short term—a fact confirmed by a McKinsey Quarterly survey of more than 1,000 CEOs and board members.
We found that although here have been some unhelpful regulatory changes (for example, new solvency rules in the insurance sector), the underlying problem is a breakdown of the investment value chain. This value chain runs from savers to asset owners (such as pension and sovereign-wealth funds) to asset managers to corporate boards and finally, to management. While savers invest their capital for broadly long-term goals like retirement, most asset owners parcel this capital out to asset managers, who are usually incentivized on a short-term basis against a benchmark. These asset managers in turn put pressure on corporate boards and management to deliver over the next quarter.
In January 2014, Mark and I published a second Harvard Business Review article, "Focusing capital on the long term," to share this perspective. But we knew that making change happen would require broad support for practical recommendations based on the real-world experience of corporate executives and investors. Working with a group of about 20 senior executives and investors, we started to develop the recommendations that you can now find summarized in our white papers Investing for the future: A long-term portfolio guide, Straight talk for the long term: How to improve the investor-corporate dialogue (available on the Focusing Capital on the Long Term website, fclt.org), and in our most recent Harvard Business Review article together, "Where boards fall short" (January 2015).
The Long-Term Value Summit was a chance to debate these ideas and encourage action among a wider set of business and government leaders. US Treasury Secretary Jack Lew opened the session by calling for longer-term views and laying out a plan based on trade legislation, tax reform, infrastructure investment, and education. Larry Fink followed with a moderated discussion of his push to encourage boards and CEOs to be more oriented toward the long term. He argued that the media, in particular, play a very unhelpful role here.
Next up was Nitin Nohria, dean of Harvard Business School, who led a “fire starting" session with the whole room, probing what individual CEOs had done to balance short- and long-term pressures in their organizations or how they had kept their teams focused on a long-term "North Star" in the midst of short- and medium-term uncertainty. (For anyone who has sat through a Harvard Business School case, it was fun to see some of the world's most successful CEOs being cold called!)
The participative approach continued with breakout groups building on the recommendations in our reports and fleshing out actions that attendees could take as investors or as companies. In the afternoon, prompted by the question, “What can we do together?" we continued in breakout groups to determine how to improve the dialogue between investors and corporates, how to create a long-term ecosystem (inclusive of media, Wall Street, and regulators), and, last but not least, how to drive change.
Perhaps most exciting was our final session: a discussion of the commitments to action that attendees were willing to make. These included a chief investment officer announcing that his funds would lengthen the time horizons over which asset managers were remunerated; another announcing that his organization would create a long-term value index to replace its existing benchmark; and a third announcing a change program to retrain fund managers. CEOs talked about ending quarterly reporting, publishing a suite of long-term performance and health metrics, and having more frank conversations with their boards. There was also enthusiasm to continue to work together in small groups of investors and companies to “fix" the investment value chain.
As for McKinsey, we have a role to play here as trusted advisers to organizations and senior leaders across the investment value chain. Whether advising companies on strategy and corporate finance, serving big investors and asset managers, or counseling new CEOs and change leaders, we will sharpen our focus on value creation over the long term. After all, our core mission has always been to help our clients improve their performance in an enduring and sustained manner.
Read the research, find out more about the initiative, and view the essay collection, Perspectives on the Long Term.