Long-Term Capitalism - why big investors are crucial to ending short-termism

Tuesday, Nov 22, 2016
by vrosenth

On November 17th, Jean-Hugues J. Monier, Senior Partner with the Corporate Finance & Strategy practice at McKinsey & Company gave a talk on the crucial role that big investors must play to end the plague of short-termism - the exclusive focus on quarterly returns and relentless shareholder pressures.  The discussion was facilitated by JC de Swaan from Princeton University.  The talk was very well attended by Princeton University students interested in corporate finance and public policy. 

Monier showed that senior executives feel under strong pressure to demonstrate financial results within 2 years while the average industry "long-term" horizon is 10.6 years.   An additional pressure on CEOs is the marked decline in CEO tenure from 9.5 years in 1995 to 6.9 years today. These pressures lead to the loss of long-term value for short-term returns and to a systematic under-investing by leading public companies.   

Taking investments in China by major corporations as an example, Monier showed that long-term thinking is essential for success.  It took Walmart 11 years to break even in China and Apple's share price fell by 25% the year the first Ipod was released.  These companies were able to weather the ups and downs of the market and achieve long-term profits. But, barriers to long-term thinking are prevalent across the investment value chain.

How can this be fixed? Concerned with the deleterious effects of short-termism a group of business and investment leaders founded the FCLT (Focusing Capital on the Long Term) Global Initiative in 2013.  FCLT works with key actors from across the investment value chain, including asset owners, asset managers and corporations, that are committed to achieving long-term tangible actions that benefit businesses, markets and society.  Monier invited the students to visit the FCLT website to learn more about this initiative.

Monier also encouraged the students to watch a 2016 Davos roundtable, "The Long-Term Imperative," where industry and financial sector leaders discussed the question of "...how business leaders make decisions for the long term?" 

Despite many obstacles, Monier is optimistic about the prospects of moving towards a long-term focus and urged the students to keep a long-term mindset as they enter their professional lives.

To view the slides click here.

For some photos from the talk click here.