‘myopic’ markets are hampering progressJune 2002
Short-termism driven by the financial markets is proving one of the biggest barriers to the spread of corporate social responsibility, a corporate law expert has argued.
Lawrence Mitchell, professor of law at George Washington University Law School in the US, says the investment market forces senior business executives to focus on half-yearly and quarterly results rather than to plan a sustainable future for their companies.
‘In the last ten years the average holding period for stock in the US has gone from two years to eight months,’ Mitchell told the annual conference of the Coalition for Environmentally Responsible Economies in Washington DC.
‘We’re living in an environment in which the job of corporate managers, and the price of their company’s stock, are in jeopardy if they don’t make the quarterly numbers.
‘Unless the markets become more patient, then corporate managers are just not going to be able to respond to the CSR agenda, which is much more long term.’
His views echo recent comments by former BT chairman Sir Iain Vallance that ‘a company that simply dances to the fickle tunes of the analysts and the financial markets, rather than attending to its customers, its employees, its ordinary shareholders and the community at large, does itself no good’.
Mitchell said part of the solution would be to alter the US capital gains tax regime so that investors, including executives holding exercisable stock options, had less incentive to sell quickly.
His stance was backed by Joan Bavaria, a key figure on the US socially responsible investment scene and founder of the fund management company Trillium Asset Management, best known in Europe for its shareholder activism.
‘It’s ridiculous that in some circumstances day traders can hold stock for ten minutes and pay no more tax on the gains than someone who held it for 20 years,’ she said.
‘People in the world of socially responsible business need to form an alliance with chief executives to tackle the short-term myopia on Wall Street,’ she said. ‘Companies are only asked what their expectations are for the next quarter, and if they don’t live up to those they are punished heavily. That means sustainability does not even register.’
Tim Little, co-founder of the Rose Foundation, a US-based charity that works with businesses on community regeneration, said: ‘We have got to get beyond the tyranny of the closing bell of the Dow.’
Michael Sauvante, founder and chief executive of technology company Rolltronics, told the conference his firm had decided to take a corporate lead by refusing to produce any short-term financial projections for investors.
‘We are going to overtly tell Wall Street that we are not going to do things on a quarterly basis,’ he said. ‘We will just say no, and tell them we are not going to stand for it.’
However, Sauvante acknowledged that most of Rolltronic’s investors came from the SRI sector, and were therefore likely to be more sympathetic.
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