This was an interesting session from the Council of Institutional Investors Fall 2015 Conference in Boston. Please feel free to post corrections, counterpoints and additional relevant material on topic of Investing for the Long-Term, using the site’s comment feature. Find more posts from the conference on this site or Twitter by searching #CIIFall2015.
Investing for the Long-Term
Short-term pressures came more from boards than from investors. Real or perception? Regardless, there is an obvious need for more communication. Unileaver switched from quarterly earnings guidance to annual. Quarterly guidance should mark progress to goals – intrinsic value vs trading value.
Grier made the point that when companies “missed,” what that really means is that analysts missed predicting earnings. Quarterly calls end up talking too much about missing guidance or predictions, instead of focusing on what progress has been made towards what goals.
We want alignment between company and asset managers. Capital deployment, strategic direction, realization for benefit of shareholders. Stock pickers who can understand fundamentals are hoping for convergence between intrinsic value and market price. When is it coming true? How does it get recognized? [Corpgov: Maybe funds need to take a more active role in getting intrinsic value recognized?]
By definition, passive investors are investing for the long-term. They have to stay invested, so tools to add value are engaged. Stock pickers frustrated that value isn’t recognized because of lack of analysis. Real life is what we live with people who trade in high frequency or on headlines or based on algorithmic trading. Exchanges now earn much of their money from high frequency traders. To them, companies are merely ticker symbols. That added to the pressure to not be public companies. Public companies are more subject to public pressure and serving the public good. That matters if it negatively impacts share price. Frustrations were voiced around understanding market economics… around ‘behavioral’ trading.
Compensation. How much does it influence behavior? It influences behavior, whether gaming or not. What are the key measures and how aligned with compensation system? Yes, compensation should align with intrinsic value but the ultimate reportcard is the market. The easy way out is to focus on quarterly EPS but companies must answer why they dropped programs that would add to intrinsic value. Overlays matter. Investing for the long-term requires frequent explanation.
Executives about to retire in a year or so that are far underwater with their stock options might be more willing to take outrageous risks. Board should be doing more than an organization chart succession planning process.
Director compensation. Much of it should be fixed for independence and balance. Compensation should be constructively positive. A fair percentage should be permanently in stock for alignment. Look 2-3 generations past the current CEO. Significant holdings should be required by the guidelines.
Improving investor / corporate dialog. Analyst are short-term. ESG specialists are generally focused on investing for the long-term but not so focused on business fundamentals. We need better integration of the two. Currently, their is to much fragmentation, although less of a schism than in past. Active investors beginning to think about long-term ESG issues. Need more engagement between boards and asset managers. Putting governance professionals in the investment teams.
Volume is an issue with regard to governance issues. If lack of alignment, that is a warning sign. Lead director or chair should be spending a lot of time talking to shareholders. Yet, there is skittishness around meetings because of possibility of disagreement and tone. Framing expectations is critical. Clarity on mandates. What are we trying to achieve? There is too much playing to investment consultants. If truly long-term, that is a leap of faith but you want progress reports.
Ready sources of liquidity are crucial. Diversification of assets is advisable so companies are not put in a position of selling when they shouldn’t.
Stock buy-backs $90B this year. Are they trading off short-term against long-term? Consider distribution context. Distributing assets makes the case… provides validation of what’s going on in business. It can add to credibility. Validates ability to generate cash. Must ask, if you reinvest in the business are you really going to enhance returns? Be clear on company’s long-term strategy. If there is lack of clarity, then send the money back to investors. Buybacks vs dividends. Dividends more of an ongoing covenant and commitment. If buybacks, be clear that you are buying back appropriately, when stock prices are low.