This new KPA Advisory report, based on a recent survey of over 80 major pension funds, identifies a positive correlation between the quality of institutional investors’ internal corporate governance practices and their long-term investment practices. The findings further suggest that better internal governance actually drives long-term investing.
Unfortunately, however, it appears (based on the current as well as prior surveys) that there are significant governance deficits and long-term investing “aspiration vs. reality” gaps that need to be addressed to minimize short-termism and – instead – promote a long-term investment approach.
Principle governance deficits include:
– Board selection and improvement processes continue to be flawed in many cases.
– Board oversight function in many organizations needs to be more clearly defined and executed.
– Competition for senior management and investment talent is often hampered by uncompetitive compensation structures.
Barriers to long-term investing include:
– Regulations that force short-term thinking and acting
– Short-term, peer-sensitive environment that makes it difficult to truly think and act long-term
– Absence of a clear investment model, performance metrics and language that fit a long-term mindset
– Alignment difficulties in outsourcing, and compensation barriers to in-sourcing
This CFA Institute blog – which discusses short-termism factors identified in the report, as well as the short-termism problem more generally – suggests that the time has come for a global set of standards and curricula to govern fund fiduciaries.
See also this 2013 Focusing Capital on the Long Term initiative-driven study revealing perceptions that short-term result pressures have been intensifying – which was the impetus for the current KPA Advisory project.
Building a Board for the Long-Term
This new Spencer Stuart publication is part of a more comprehensive essay collection reflecting the views of CEOs, directors, investors and regulators about what it will take to change current behaviors among companies and investors that compromise long-term growth for short-term gain. The paper provides guidance to boards on how to avoid succumbing to short-termism pressures and act – instead – consistently with a long-term view.
The essay collection is part of the broader Focusing Capital on the Long Term initiative co-founded by CPPIB (Canadian Pension Plan Investment Board) and McKinsey in 2013 to develop practical approaches for longer-term behaviors among both companies and investors.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Cybersecurity Guidance for Directors
– Directors Logging Many Hours for Board Service
– OECD’s Draft Updated Principles Support Proxy Access
– Under Attack: The SEC’s Use of Administrative Law Judges in Enforcement Actions
– Fine-Tuning Your Section 16 Reporting
– by Randi Val Morrison