Idea in Brief
The Problem
Calls in the past five years for corporate leaders to abandon their focus on maximizing short-term financial performance have been ineffective. The ongoing short-termism in the business world is undermining corporate investment, holding back economic growth, and lowering returns for savers.
Who Should Lead Change?
Action must start with large asset owners such as pension funds, mutual funds, insurance firms, and sovereign wealth funds. If they adopt investment strategies aimed at maximizing long-term results, then other key players—asset managers, corporate boards, and company executives—will likely follow suit.
Making It Happen
Big investors can take four proven, practical steps: (1) Define long-term objectives and risk appetite, and invest accordingly. (2) Practice engagement and active ownership. (3) Demand long-term metrics from companies to inform investment decisions. (4) Structure institutional governance to support a long-term outlook.
Since the 2008 financial crisis and the onset of the Great Recession, a growing chorus of voices has urged the United States and other economies to move away from their focus on “quarterly capitalism” and toward a true long-term mind-set. This topic is routinely on the meeting agendas of the OECD, the World Economic Forum, the G30, and other international bodies. A host of solutions have been offered—from “shared value” to “sustainable capitalism” —that spell out in detail the societal benefits of such a shift in the way corporate executives lead and invest. Yet despite this proliferation of thoughtful frameworks, the shadow of short-termism has continued to advance—and the situation may actually be getting worse. As a result, companies are less able to invest and build value for the long term, undermining broad economic growth and lowering returns on investment for savers.
