Ethical Performance
inside intelligence for responsible business


investors call for ‘radical’ rethink on short-termism

May 2007

A group of institutional investors that manage combined assets of £170billion ($340bn) has issued a guidance note calling for an end to the present preoccupation with short-term financial results.

The 36-page note from the Marathon Club, an international alliance of trustees and senior executives in the institutional investment sector, argues the short-term focus is, among other things, distracting attention from the ‘key issue’ of corporate responsibility. It says investors cannot monitor the ‘management of social and environmental risks’ if they concentrate on monetary gains over periods as short as three months.

The Marathon Club’s position is that ‘a series of short term [investment] approaches is unlikely to generate the desired return’ for pension funds and other institutional investors.

Although the number of companies reporting on a quarterly basis is now falling in the US, the club argues that short-termism is still widespread because trustees of pension funds are failing to monitor their investment managers adequately. It recommends that pension fund trustees ‘clearly articulate and explicitly record’ their investment beliefs, set specific objectives for risk and return based on those beliefs, and spell all this out to their advisers.

Among examples of investment beliefs cited in an appendix are that ‘short term performance reviews detract from long-term strategy’ and the ‘strength of a sponsor’s covenant can allow a longer term deficit recovery period, say 20 years.’

The selection of fund managers, says the statement, should be directly linked to how a candidate matches those investment beliefs relating to long-term performance. Incentive fees paid to the investment managers should discourage a short-term outlook.

Peter Scales, chairman of the club and chief executive of the London Pension Fund Authority, said: ‘Our recommendations are designed to encourage trustees to state their beliefs explicitly in writing.

‘The change in mindset required is significant and will not be achieved without the co-operation of all participants in the investment decision chain – trustees, investment managers and investment advisers.’

The club’s view that the need for companies to satisfy analysts’ quarterly earnings expectations may ‘jeopardize long term growth opportunities’ echoes a call by the US Chamber of Commerce for an end to quarterly earnings guidance. Some US corporates, including Citigroup, Coca-Cola, General Motors, Ford, Intel, Motorola and Pfizer, have already decided to end quarterly reporting of financial results on the grounds that it encourages short-termism (EP7, issue 11).

In Europe, the Dutch pharmaceuticals company DSM recently tried to introduce a ‘loyalty dividend’, giving ten per cent extra annually to shareholders who retain their holdings for at least three years. But the move was successfully challenged in court by a US-based mutual fund, Franklin Templeton Investments, and was dropped before it could be voted on at DSM’s annual meeting.

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