Sep 29 2019

Predicting Long-term Success for Corporations and Investors Worldwide

The research is piling up. Companies that aim for long-term success tend to find it, while those who reach for short-term gains end up with lower corporate profits, reduced shareholder returns, and more limited job creation. 

Through our research, FCLTGlobal aims to identify the key determinants of long-term success for companies and investors around the world. We then use this knowledge to encourage long-term behaviors across capital markets.

This paper focuses on predictors of long-term health that are grounded in rich global data going back over time. Looking across the value chain—at companies, asset managers, and asset owners—we find the following:

  • Global companies are falling short on long-term behaviors.
    Companies are scoring lower than they did in 2014, and well below the level reached before the financial crisis, on our overall measure of long-term behavior. If companies were more long-term, our research suggests they could earn an additional US$1.5T per year in returns on invested capital (ROIC, our preferred measure of performance).
  • 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 marginal value of additional 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.

  • 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.

Of course, not all drivers of long-term success are easily measured or detected, and if more data were available, we could deepen our understanding of vital factors such as talent retention and customer loyalty. But even with existing data limitations, we are able to confirm some well-known predictors of long-term success and also unearth some novel ones.

What follows is a fuller account of our findings, our methodology, and our thoughts on how best to extend these results in the future.

Read the full report