How to improve the investor-corporate dialogue
Short-term behavior is becoming the norm in modern capital markets. Rather than pursuing and communicating long-term strategies, many public companies dedicate significant resources to meeting quarterly earnings guidance and communicating their performance relative to this guidance. This focus on short-term actions and communications seems counterproductive, considering that more than 50% of a typical company’s value is created by activities that will take place three or more years in the future.
Research shows that the current emphasis on achieving short-term earnings targets leads to value destroying behaviours:
- One survey found that 55% of CFOs would avoid undertaking an investment that enhanced net present value if it meant falling short of the quarter’s consensus earnings per share (EPS).
- 78% of executives said they would take actions to improve quarterly earnings at the expense of long-term value creation.
- Companies that expressly seek to manage short-term earnings in order to narrowly beat consensus also underperform peers after two years.
The investor-corporate dialogue can help counteract this short-term bias. We define “investor-corporate dialogue” as the flow of information and ideas between corporations and their current and future investors and have three primary recommendations for companies that seek to strike a better balance between short-term performance and long-term value creation:
- Build and communicate a compelling long-term strategy.
- Measure value-creation initiatives and performance relative to metrics that are specific to your company and long-term strategy.
- Report to and engage with long-term investors.
Read the paper “Straight talk for the long term” for a brief look at these ideas, and for an extended discussion read ‘Straight talk for the long term: an in-depth look at improving the investor-corporate dialogue