A global survey of corporate directors and CEOs, conducted by Canada Pension Plan Investment Board (CPPIB) and McKinsey & Company, found pressures on senior executives to show short-term financial performance have increased in recent years. Respondents identified innovation and strong returns as the top benefits if companies took a longer-term view. CPPIB and McKinsey earlier this year launched the Focusing Capital on the Long Term initiative, which will set out the case for institutional investors and boards to focus on long-term value creation.
GLOBAL SURVEY SIGNALS SHORT-TERM PRESSURES ON BUSINESS LEADERS ARE MOUNTING
New initiative seeks to enable a move to longer-term mindsets
TORONTO, ONTARIO (May 22, 2013): Speaking at the Institute of Corporate Directors annual conference, Mark Wiseman (President and CEO, CPPIB) and Dominic Barton (Global Managing Director, McKinsey & Company) called on business leaders to focus their thinking and actions on long-term value creation.
Announcing a joint initiative, entitled “Focusing Capital on the Long Term”, Barton and Wiseman described short-termism as a central concern in today’s global economy and discussed the pivotal role that corporate directors and institutional investors can take to foster long-term thinking and action.
As part of Focusing Capital on the Long Term, CPPIB and McKinsey conducted an international survey of corporate directors and CEOs, in order to understand their views on the need for long-term value creation and to identify the causes and risks of short-termism in the markets and in business:
Sixty-three percent of business leaders indicated the pressure on their senior executives to demonstrate strong short-term financial performance has increased in the past five years.
Seventy-nine percent of directors and senior executives said they felt the most pressure to demonstrate strong financial performance over a time period of less than 2 years. Only 7% said they felt pressure to deliver strong financial performance over a horizon of 5 or more years.
However, respondents identified innovation and strong financial returns as the top two benefits their company would realize if their senior executives took a longer-term view to business decisions.
Yet, almost half of respondents (44%) said that their company’s management team currently uses a primary time horizon of less than 3 years when they conduct a formal review of corporate strategy. Seventy-three percent said this primary time horizon should be more than 3 years and 11% said the horizon should be more than 10 years. i
Recognizing that time horizons vary by industry and asset type, Barton and Wiseman introduced a new definition for long-term to set a common foundation for the initiative’s work: Long-term thinking goes beyond a product cycle, beyond the average tenure of directors or the CEO, and beyond a typical investment cycle.
Dominic Barton, Global Managing Director of McKinsey & Company, said:“There is strong evidence, across the value chain, that long-term thinking creates enduring benefits for companies, their investors, and society while short-term thinking destroys value. Our aim is to move quickly to action to address the issue of short-termism and develop practical tools and approaches to help institutional investors and corporate directors execute long-term strategies.”
Speaking about the challenge in moving to long-term mindsets, Mark Wiseman, CEO of CPPIB, said:“We recognize the scale of the challenge in changing short-term attitudes and behaviours that have become all too ingrained in business, investment and society. We are not looking at an immediate fix to the problem of short-termism. This will take time, persistence and commitment from all involved. This initiative is focused on creating a roadmap for change.”
About the joint CPPIB and McKinsey initiative Focusing Capital on the Long Term
In early 2013, the CPP Investment Board (CPPIB) and McKinsey & Company began a joint effort to set out the case for institutional investors and corporate boards to focus on long-term value creation. The initiative, Focusing Capital on the Long Term, was formally launched today at the 2013 Institute of Corporate Directors (ICD) National Conference. The ICD is the pre-eminent organization in Canada for directors in the for-profit and not-for-profit sectors.
With a mandate to contribute to the long-term sustainability of the Canada Pension Plan, a multigenerational fund belonging to the 18 million Canadians who are current and future beneficiaries, CPPIB has a compelling interest in driving a return to long-term fundamentals in the investing and business worlds. Under the leadership of Mark Wiseman, CPPIB is committed to encouraging market participants to adopt longer-term perspectives.
Having witnessed the benefits of long-term thinking in Asian economies for more than 20 years, McKinsey’s Dominic Barton has been a leading advocate of the need for long-term thinking and published a landmark article on the issue, “Capitalism for the Long Term,” in the Harvard Business Review in 2011.
During 2013, CPPIB and McKinsey will continue to engage with leading institutional investors and corporate directors to identify structures and metrics that support longer-term behaviours and enhance long-term value creation. In 2014, they will release their initial recommendations and push for the adoption of behaviours and mindsets that will foster a significantly longer-term perspective across the investment industry and in the boardroom.
About CPP Investment Board
CPP Investment Board is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 18 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, the CPP Investment Board invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in London and Hong Kong, CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At March 31, 2013, the CPP Fund totalled $183.3 billion. For more information about CPP Investment Board, please visit www.cppib.com.
About McKinsey & Company
McKinsey & Company is a global management consulting firm dedicated to helping the world’s leading organizations address their strategic challenges. With consultants deployed in more than 60 countries, McKinsey advises on strategic, operational, organizational and technological issues. The Canadian Practice was launched in 1968 and has offices in Toronto, Montreal and Calgary.
For more information, please visit us at www.mckinsey.com.
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CPPIB McKinsey & Company
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