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Foreword

Andrew Edgecliffe-Johnson, US Business Editor, Financial Times

Welcome to the first of our FT Moral Money Forum reports. Its theme flowed naturally from the circumstances in which the members of our thinktank held their first discussion: on a video call, in the middle of a historic pandemic. We wanted to focus on topics of lasting importance to a wide array of FT readers, but we were gathering at a time of almost unprecedented uncertainty about the short term.

The human and financial pressures Covid-19 has imposed mean that business and investment leaders have rarely been more aware of the potential trade-offs in trying to look beyond their next quarterly performance statement. And yet, as Sarah Murray discovered when she polled FT Moral Money readers, explored the data and interviewed leading thinkers and practitioners on this subject, there has also rarely been more momentum behind efforts to make business and investment more long-term focused.

This report focuses not just on the case for looking to a further horizon, but on the practical ways in which some long-term leaders are showing it can be done. We hope you enjoy it.

Until recently, the chief claim to fame of the small French town of Florange was as the seat of Lothair II, the Saxon king of Lorraine who fell out with the Pope after he tried to leave his wife for his mistress. But in 2014 its name entered the capital markets lexicon when it appeared in legislation that requires French companies to give double voting rights to investors who hold their shares for two years or more.

The Florange law was named after the industrial community that was at the centre of a bitter row several years after the hostile €26.9bn takeover of Arcelor by Mittal Steel. The company tried to shut down the town’s two blast furnaces — until a French minister accused it of “blackmail” and “lies” and threatened nationalisation.

The incident was an early sign of unease over the shorttermism that many companies, investors and policymakers say has undermined progress towards more sustainable business practices.

Seven years on, a host of other responses has emerged around the world, from the launch of the Long-Term Stock Exchange in San Francisco to the ditching of quarterly earnings reports, most famously by Paul Polman when he was chief executive of Unilever.

In this outcry against short-termism, big investors have had the loudest voices. In 2018, the billionaire investor Warren Buffett joined Jamie Dimon of JPMorgan Chase to lament the “unhealthy focus on short-term profits” that stems from three-monthly earnings guidance.

And the biggest of them all, BlackRock (now with $8.68tn in assets under management) has a CEO, Larry Fink, who frequently complains that companies are too focused on quarterly results.

By early 2020, short-termism was being attacked by everyone from executives at Davos to environmentalists at not-for-profit groups such as the World Wide Fund for Nature.

Their frustration is unsurprising given the evidence of how bad it is for business. In 2020, for example, the CFA Institute, the association for investment management professionals, estimated the cost of short-termism to S&P 500 companies at $79bn a year in forgone earnings. Three years earlier the McKinsey Global Institute found that companies which took a long-term approach had 47 per cent stronger cumulative revenue growth, with less volatility, than other groups. Yet 70 per cent of executives surveyed by McKinsey last year believed that their CEOs would sacrifice long-term growth for short-term financial objectives.

Today the short-term approach to business and investment is also blamed for hampering ESG investing: the environmental, social and governance strategy, which, studies say, drives stronger long-term returns. Last year Morningstar found that funds with higher ESG ratings outperformed their benchmark indices more frequently than those exposed to greater ESG risk. Meanwhile, inflows into ESG investments have risen so sharply that in February 2020 the Financial Times ran an article with the headline: ‘Monstrous’ run for responsible stocks stokes fears of a bubble.

A month after that, the world was turned on its head. With countries locking down their citizens, capital markets nosediving and dire predictions of the economic fallout, the Covid-19 pandemic had CEOs wondering if their companies would make it to the next month. In this moment of acute short-term pressure, the question many asked was whether the foundations of the longer-term, sustainable approach were about to crumble.

Sarah Williamson likens the persistence of short-termism in business and investment, despite evidence of its costs, to car dealers who offer a discount simply because the end of the year is approaching. “It is pervasive,” says Williamson, CEO of Boston think-tank FCLTGlobal, which champions long-term investing. “People try to hit quotas and they will cut corners to do it.”

Faced with the threats to profits caused by the Covid crisis, the temptation has been to cut much more than corners. Early in the pandemic, this instinct seemed to threaten what had been a growing commitment to sustainable approaches. Just months after 181 US CEOs belonging to the Business Roundtable had pledged to run their companies for the benefit of all stakeholders, including employees, several of them had to make deep cuts in headcount to weather the storm (though some cut their own salaries too).

Of course, short-termism existed long before the pandemic, and laying blame for it on any one player in capitalism’s ecosystem is tough. When we asked FT Moral Money readers whether business was too focused on the short-term, the response was an overwhelming “yes”. But there was less agreement when asked for the reasons. Respondents pointed to everything from executive compensation to an “obsession with quarterly earnings and reporting to appease shareholders”.

Matt Orsagh, a governance expert who is director of capital markets policy at the CFA Institute, encountered this phenomenon while researching Breaking the Short-Term Cycle, the institute’s 2006 report. The team asked finance professionals what drove short-termism. “We got them all round the table and fingers were pointed,” he recalls. “‘It’s the sell side; it’s the buy side; it’s hedge funds; it’s compensation; it’s the earnings guys’ practices.’ We found that everyone was right in that we all played a role.”

For Judy Samuelson, who founded the Aspen Institute’s business and society programme, one of the biggest culprits is the shareholder primacy mantra, which has been drilled into investors and corporate executives by business schools and the media since Milton Friedman’s 1970s heyday. “It’s the noise they’re constantly hearing,” says Samuelson, author of The Six New Rules of Business: Creating Real Value in a Changing World. The design of executive pay packages amplifies this noise, she says. She also believes that most executives want to do the best for both their company and society but their financial rewards work against this. “They are not unaffected personally by the design of pay,” she observes.

Many investors agree with this. In fact, seeing executive pay tied to short-term share-price moves has become a red flag for some. “Where we tend to be less supportive of executive compensation proposals is when they are single-metric driven, only looking at share price and not considering performance more in the round,” says Sandy Boss, global head of investment stewardship at BlackRock.

Myths persist that maximising shareholder value, including giving priority to short-term gains, is part of a board of directors’ fiduciary duty. Colin Mayer of the Saïd Business School at Oxford university stresses that such falsehoods must be put to rest. “The law not only allows directors to pursue the success of the company for the long-term,” he says, “but in the case of the UK, it requires directors to take into account the impact of the long- as well as the short-term.”

Orsagh sees something even more fundamental at work in the reluctance to think long-term: human nature. Short-termism is so ingrained, he argues, that finding a single easy answer is tough. “Whether it is politics or finance or daily life, short-termism is something everyone struggles with.”

When wildfires swept through California last year, they not only highlighted the real cost to business of a warming planet, they hammered home the fact that being in the middle of one crisis does not exclude others. For companies espousing long-termism, climate risks have long been part of the discussion. But the pandemic and 2020’s racial-justice protests added the need to promote diversity, health and fair working conditions to the list that is driving companies towards a more strategic approach. “We’ve had a huge wake-up call that employees want something different,” says Samuelson.

One leader who welcomes the new pressures is Claus Aagaard, CFO of Mars, which with Saïd Business School launched the Economics of Mutuality, now an independent think-tank that helps companies to embed sustainable strategies. “The good news is it comes more and more naturally,” he says. “The data is clear in terms of what needs to get done, it is what the talent wanting to join corporations like ours wants to see and it is increasingly clear what consumers want to see.”

However, the push for companies to extend their horizons is coming not only from employees and consumers. In the investment community, money is talking. By 2018, ESG funds represented $11.6tn in assets under management in the US alone, 44 per cent above 2016’s figure of $8.1tn, according to the Forum for Responsible and Sustainable Investment.

Money managers have also turned up the heat on shorttermism. In his 2021 letter to CEOs, BlackRock’s Larry Fink called for companies to demonstrate how their plans to cut carbon emissions and increase workforce diversity will fit into their long-term strategies. Meanwhile, three of the world’s largest asset owners teamed up to send a polite but firm warning to companies and money managers.

In March 2020, Japan’s $1.6tn Government Pension Investment Fund, the $282bn California State Teachers’ Retirement System and the UK’s USS Investment Management (which manages £67bn to provide higher education staff pensions) said they were committed to companies that “create value for us over the long-term”. Asset managers focusing on short-term financial measures at the expense of longer-term sustainability-related risks and opportunities were “not attractive partners for us”. The statement did not specify the consequences for partners deemed unattractive but the message was clear: they would no longer tolerate myopic behaviour.

Activist investors such as corporate raider Carl Icahn have often been blamed for boards’ obsession with the shortterm. In recent years, however, a new breed has appeared: the climate activist. Among them is Mark van Baal, founder of Dutch shareholder group Follow This, which pushed Royal Dutch Shell to make a more ambitious commitment to reduce its carbon emissions. Another is Climate Action 100+, an alliance of investors with a combined $52tn in assets under management, which presses companies to cut emissions, strengthen governance and enhance climaterelated financial disclosures.

Even mainstream investors that do not identify as activists now ask new questions, says Wendy Cromwell, director of sustainable investment at Wellington Management.

“We’ve done over 18,000 company meetings this year, which is well above our normal run rate, and one of the reasons is that investors are really interested in understanding how companies cope with crises,” she says. “Instead of questions about whether you’re going to beat or miss a quarter, you hear investors asking how has the crisis informed strategic planning or what opportunities might arise after it has passed – things that are more strategic and long-term.”

Tangible evidence of the effect of a warming climate on economies and individual companies has prompted discussion among business and investment executives about long-termism and, by extension, sustainability. FT Moral Money readers have noticed the shift. “The evolving materiality of issues like climate change is such that leading businesses are beginning to factor these existential-threat issues into action now,” observed one. “Are they doing enough? Not yet but there appears to be an increasing realisation that radical action is needed, and it is in the interest of business to lead on this.”

The prospect of more climate legislation undoubtedly plays into this. China, South Korea and Japan are among those to have pledged to become carbon-neutral economies, as has the EU with its proposed European Green Deal. In the US, the Biden administration has stressed its intention to take climate action seriously, and this will include rejoining the Paris Agreement.

So while many wondered whether the pandemic would result in business and the capital markets taking their eye off the ball with respect to long-termism, a number of forces – including the Covid crisis itself – seems to be driving the opposite response. “The fact that we are in the midst of a pandemic makes us all realise there are long-term systemic issues that can have short-term impacts,” says Cromwell.