Investment Chains - Addressing corporate and investor short-termism
A report by the British TUC
10/03/2006
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Introduction
“The pressure on the sell side has in my view
made analysts very focused on the near term and in some instances
their understanding of our business fundamentals is less than it
used to be. Some even expect us to fill in their models for them.
Research tends to be more sensational and on roadshows there is
increasing pressure to put us in front of hedge funds rather than
traditional long funds. It may be old-fashioned, but I view a
shareholder as a shareholder – someone whose interests in the
success and prospects of the company lasts more than three weeks –
or less. It may be the market, and we all know we can’t buck the
market, but I have real concerns about promoting the use of my
company’s stock as hedge fund plays – just as I would in if they
were chips in a casino.”
John Sunderland, 21st April 2005
As Chair of Cadbury Schweppes and President of the CBI, Sunderland is well placed to highlight a problem that has often been discussed, but never solved: the UK’s relative short-termism in its attitude towards industry.
Put simply, shareholders often respond negatively to short-term
difficulties, or lower than expected profits. This attitude makes
it difficult for companies to make long-term investment decisions,
regarding skills, innovation and research and development, because
of the fear, real or imagined, that high, upfront, short-term costs
will scare away investors.
Trade unions have often criticised institutional shareholders for
looking to maximise short-term profits from business, regardless of
the impact on companies and their employees. As John Sunderland’s
comments illustrate, increasingly it seems that business is also
willing to make criticisms of investor pressure. Some business
leaders argue that their members are harried into short-termist
approaches because their shareholders are looking for short-term
relative performance.
There is also an emerging critique that too much investment analysis, as carried out by and for fund managers, focuses on a limited and short-term view of what makes successful companies. Whilst analysts are wedded to a narrow financial interpretation of companies, often based around a structured series of company announcements, this limits the ability of management to break free of short-termist shackles.
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