10/03/2006

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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related weblinks:

• Vicious circle' of business and investor short-termism is harming UK economy, TUC Website, Friday 10 March 2006