How to Cure Our Short-Term Thinking
If we have any doubt about the prevalence - and cost - of "short-termism" in global capital markets, the current economic meltdown is an obvious reminder. But, beyond the $700 billion bailout and other financial band-aids to stop the bleeding, the bigger debate is how to fix the regulatory and corporate governance systems to avoid future calamities -- whether financial or environmental.
A critical question is to whom companies should be most beholden to -- shareholders or society.
The question popped into my head last week viewing a short preview of a PBS Frontline documentary "Heat" about the challenges of reversing global warming. Among the film's most poignant moments was an exchange between the film's producer and a Chinese energy company executive who was asked if he felt any obligation to reduce CO2 emissions from his company's fast-growing fleet of new coal plants.
The CEO's immediate answer was an unequivocal, 'no.' "We must create money, not lose the money," Shenhua Energy CEO Ling Wen said. "It's my responsibility as a CEO of this company."
When pressed whether he should make climate change a higher priority, Wen said that he would if his shareholders asked him. But, he added, "I'm afraid maybe all the shareholders, they cannot accept that concept." In the meantime, China continues to build two new coal-fired power plants every week.
I wasn't surprised by Wen's answer, but it was a chilling reminder about the extent to which global capitalism -- and the investors and companies that drive the global economy -- has lost its way in terms of its overriding purpose.
While I'm all in favor of wealth creation and rewarding success, how we define corporate success is out of whack. Shareholders -- an increasingly vague term with the growth of hedge funds and sovereign wealth funds -- should not be the preeminent rulers of companies and quarterly earnings should not be the only gauge for measuring CEO performance. We need to broaden our definition of success so that long-term corporate sustainability and long-term global sustainability get the attention they deserve. Failing to do so will mean more global calamities, both financial and environmental, as the grow-at-all-costs global economy races ahead with little regard for social and environmental consequences.
I do not have all the answers on this, but many other smart people have been pondering these issues the past few years since the Enron debacle -- and their ideas deserve close attention.
In June 2007, a broad coalition of leading companies, investors, and other stakeholders released the Aspen Principles for Long-Term Value Creation as a call to action to reverse the capital market's bias toward short-term thinking. Among the key corporate actions it identified:
- Setting long-term metrics that de-emphasize earnings per share and quarterly profits as the metric of choice
- Incentive systems and compensation schemes that reward long-term focus and success
More recently, Corporation 20/20 came out with its own set of policies for fostering corporate long-termism. Among the group's key principles is that the corporation shall accrue "fair returns for shareholders, but not at the expense of the legitimate interests of other stakeholders," such as employees, communities, the environment and future generations. One suggestion the group makes for achieving this is reducing the clout of short-term investors (hint: hedge funds) inclined to quick fixes to boost short-term profits. One lever the group suggests is requiring investors to hold shares for a year before before gaining voting rights or increasing capital gains taxes on short-term trades. Similarly, compensation incentives might be changed to modify or even outlaw stock options, or make bonuses contingent on achieving social and environmental performance targets.
While these ideas may seem radical, they are worthy of attention once the dust settles on Wall Street and the focus shifts to addressing the fundamental market drivers that contributed to the collapse.
Mindy S. Lubber is president of Ceres, a leading U.S. coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change. Lubber also directs the Investor Network on Climate Risk, a network of 65 leading investors with collective assets totaling $5 trillion focused on the financial risks and opportunities from climate change.