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Report Finds that Companies Are More Short-sighted Than Before the Financial Crisis

Predicting Long-term Success Cover_edited

Boston, MA, 30 September 2019 – FCLTGlobal, a not-for-profit organization that advocates for a longer-term focus in business and investment, released today a report that identifies the key predictors of long-term success for global companies and investors. The report, Predicting Long-term Success for Companies and Investors Worldwide, focuses on predictors of long-term value creation grounded in global data going back over time. These measurements look at the three primary actors along the global investment value chain: corporations, asset managers, and asset owners.

Among the main findings of the report is that global companies are currently falling short on behaviors that are favorable to creating long-term value. Based on FCLTGlobal’s model, which scores 5-year trailing return on invested capital (ROIC) weighted against a variety of long-term indicators such as fixed investment, revenue tied to R&D, and board gender diversity, companies are scoring lower today than they were before the global financial crisis of 2008. If companies were more long-term, FCLTGlobal's research suggests they could earn an additional US$1.5T per year in returns on invested capital. 

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In order to track progress and improvements on these recommendation behaviors, FCLTGlobal has identified these long-term indicators using data that can be measured in a consistent way moving forward. Predicting Long-term Success tracks these indicators over the course of the past several decades in order to provide a snapshot of global long-term investment since the turn of the century.

“Measuring change is the only way to spark real behavioral shifts within the marketplace – companies and investors need to know where there is room to improve. This report is the first step in calculating the factors that are integral to creating long-term value,” said Sarah K. Williamson, FCLTGlobal’s CEO. “What we’ve found conclusively is that companies that are only focused on short-term gains end up with lower corporate profits, reduced shareholder returns, and limited job creation.”

Other key findings from the report include:

  • Net returns for asset owners are linked to both governance and investment strategy. Relevant factors include board diversity, active ownership, lower costs, a higher funded ratio, and higher exposure to both public and private equity.
  • Overdistribution of capital can be a drain on corporate performance. Although distributing capital via buybacks and dividends makes sense in some circumstances, our analysis finds that companies taking this approach tend to generate lower five-year ROIC. Our research suggests that companies that reinvest greater portions of their earnings back into the company outperform their peers in ROIC by 9% per year, on average.
  • Corporate research and development (R&D) can boost returns. By looking at the increase in revenue from an increase in research spending, we show that R&D investments are linked to higher ROIC.
  • Employee ownership is linked to higher returns among global asset managers. Employee ownership is the strongest predictor of success for asset managers, particularly those in equity investing.
     

To read the full report or learn more about FCLTGlobal’s methodology on measuring long-term behaviors, visit www.fcltglobal.org/predictors

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Ross Parker - Communications Manager
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