Ethical Performance
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editorial

Marathon Club puts accent on staying power to win the race

October 2006

The average length of time that a stock is held is five months. More often than not, to align managers' interests with shareholders', management incentives are directly linked to short-term financial performance. But even ardent supporters of corporate social responsibility reckon it takes years for the benefits of CSR to work through. Seen that way, companies' pursuit of CSR excellence looks perverse.

Taking a short-term view of a company's prospects has long been part of investment decision-making. In uncertain financial markets, a bird in the hand is worth two in the bush, and quarterly earnings are a useful investment tool. But companies are not like fruit-flies. Quarterly figures are only one indicator of their well-being and are anyway readily massaged. Undue emphasis on short-term performance entices company managers to play to the gallery of analysts, to the detriment of shareholder interests. That is bad for investors, companies and society.

Institutional investors, with long-term liabilities, have the most to lose, hedge funds arguably the least. The former have established the Marathon Club to put this to debate and provide practical guidance for fund trustees (see page seven). The club has just finished consulting on active long-term investing.

The points to come out have the merit of being down-to-earth. Some are familiar - that trustees need more training in investment issues has been said for years. The club rightly says that short-term thinking is likely to persist, even under extended contracts, so long as performance is assessed quarterly, and that review meetings could usefully focus less on the numbers and more on how a portfolio is developing. The club will make concrete suggestions on how long-term mandates might be implemented.

One could argue that institutional investors already take a more strategic view. As much as 25 per cent of their assets are in passive mandates, and trustees generally review performance over a three-year period. That's only part of the story, however. The Marathon Club's greatest contribution may be that it has questioned how the race is run. Short-termism is not confined to the City. Quarterly figures give journalists something topical to write about, and some financial analysts live off them. Any reform of earnings guidance practices would affect various parties. Even SRI index providers bombard clients with monthly updates.

This culture will not be changed overnight. But the decision not to issue quarterly earnings by Coca-Cola, Ford and Pfizer is an encouraging start. More companies need to follow their example. Ultimately, it is a question of balance. Short-term investing has its place. The market needs it. But so far it still feels like almost the only game in town.




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