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CFA Centre, Business Roundtable
Institute for Corporate Ethics Report Calls on
CEOs, Asset Managers, Investors, Others to Adopt
Practices to Promote Long-Term Value for
Shareholders’ Benefit, Break ‘Short-term
Obsession’
- July 24, 2006
 New
York, July 24, 2006 – The CFA Centre for
Financial Market Integrity and the Business
Roundtable Institute for Corporate Ethics today
jointly called on corporate leaders, asset
managers, investors, and others to break the
“short-term obsession” harming shareholders’
interests by reforming practices involving
earnings guidance, compensation, and
communications to investors.
“The obsession
with short-term results by investors, asset
management firms, and corporate managers
collectively leads to the un-intended
consequences of destroying long-term value,
which decreases market efficiency, reduces
investment returns, and impedes efforts to
strengthen corporate governance,” the report
said. “Our broad set of recommendations –
focused on the issuer, analyst, institutional
investor, and asset and hedge fund manager
communities -- could mitigate the current
overemphasis on short-term performance.”
“Short-termism cuts across an
enterprise and results in management
actions—including reductions in research and
development, and the forgoing of strategic
investments — all in order to make the quarterly
number,” said
Dean Krehmeyer, executive director of the
Business Roundtable Institute for Corporate
Ethics. “The reforms needed to address short-termism
must be multifaceted, involving the many
stakeholders who participate in capital
markets.”
The report outlines five broad
areas of recommendations:
-
Reform earnings guidance
practices:
Companies need to reconsider the benefits
and consequences of giving earnings guidance
and make adjustments to their involvement in
the “earnings guidance game” that best
reflect shareowners’ interests.
-
Develop long-term incentives
across the board:
Compensation for corporate executives and
asset managers should be structured to
achieve long-term strategic and
value-creation goals.
-
Demonstrate leadership in
shifting the focus to long-term value
creation.
-
Improve communications and
transparency:
More meaningful, and
potentially more frequent, communications
about company strategy and long-term value
drivers can lessen the financial community’s
dependence on earnings guidance.
-
Promote broad education of
all market participants about the benefits
of long-term thinking and the costs of
short-term thinking.
Specific
recommendations from those five areas include:
-
End the
practice of providing quarterly earnings
guidance;
-
Align
corporate executive compensation with
long-term goals and strategies and with
long-term shareowner interests;
-
Improve
disclosure of asset managers’ incentive
metrics, fee structures, and personal
ownership of funds they manage; and,
-
Endorse the
use of corporate long-term investment
statements to shareowners that will clearly
explain—beyond the requirements that are now
an accepted practice—the company’s operating
model.
The report’s findings and
recommendations are based upon a research review
by the CFA Centre and the Business Roundtable
Institute for Corporate Ethics and several symposia discussions with key
stakeholders, including: corporate issuers,
analysts, asset managers, shareowners,
institutional investors, hedge fund managers,
regulators, and the media.
“The participation of the various
stakeholder groups was critical to achieving a
set of significant recommendations,” said Kurt
Schacht, CFA, managing director of the CFA
Centre for Financial Market Integrity. “Getting
all of the parties involved at the same table
led to meaningful progress. The discussions
enabled us to construct what we believe are
viable, achievable strategic solutions.”
The full report and an executive summary are
available online at:
www.corporate-ethics.org/pdf/Short-termism_Report.pdf
A
list of all 18 Recommendation is available
at:
www.corporate-ethics.org/news/list_060724.htm
CFA
Centre for Financial Market Integrity
The CFA Centre develops timely, practical
solutions to global capital market issues, while
advancing investors’ interests by promoting the
highest standards of ethics and professionalism
within the investment community worldwide.
Established by CFA Institute as a distinct
division with its own executive director and
advisory council, the CFA Centre will build upon
the CFA Institute 40-year history of standards
and advocacy work, especially its Code of
Ethics and Standards of Professional
Conduct for the investment profession, which
were first established in the 1960s. More
information can be found at
www.cfainstitute.org/cfacentre/
Business Roundtable Institute for Corporate
Ethics
The Business Roundtable Institute for
Corporate Ethics is an independent entity
established in partnership with Business
Roundtable—an association of chief executive
officers of leading corporations with a combined
workforce of more than 10 million employees and
$4.5 trillion in annual revenues—and leading
academics from America’s best business schools.
The Institute brings together leaders from
business and academia to fulfill its mission to
renew and enhance the link between ethical
behavior and business practice through executive
education programs, practitioner-focused
research and outreach. More information on the
Institute can be found at
www.corporate-ethics.org.
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