Strategic Outlook: Pushing
Markets to Take the Long View
Trillium Asset Management
Corporation
June 2005
I’ve been asked several
times recently how the stock market could be rebounding in the face of such bad
news, and in particular what appear to be large long-term imbalances. Out-of-control health care and military
spending are driving up government borrowing, and consumers are awash in debt
backed by the mirage of million-dollar, three-bedroom homes.
The markets have joined the
politicians and become hooked on short-termism, with
the election cycle being compressed into the four-times-per-year earnings
report. None other than William
Donaldson, outgoing Chairman of the Securities and Exchange Commission (SEC),
highlighted this problem in a May speech to the leading society of investment
analysts:
For companies, the
short-term outlook has given rise to the disturbing syndrome of trying to force
earnings into an artificial model of uninterrupted quarter-to-quarter
growth...“Making the numbers” often results in unsound corporate strategies,
which pay no regard to the cost of postponed investment. Such a goal is often
achieved only by bending accounting standards.
Highlighting
the breadth of the problem is the finding contained in a National Bureau of
Economic Research working paper. The authors surveyed 401 financial executives
and 78% said they would sacrifice an initiative they expected would create
economic value if it would affect their ability to realize smooth earnings.[1]
If company and analyst
behavior is going to change, the vanguard will be owners of stock, who have the
ultimate power to shape management behavior.
A good example of investor leadership for the long term is in the area
of global warming. The Investor Network
on Climate Risk (INCR) is devoted to raising climate risk awareness among
institutional investors. It includes 45
participating members with $2.7 trillion in assets. These investors realize that climate change
is not simply a public policy issue, but also a long-term investor issue with
fundamental impact on regulation, liability and the very structure of the
underlying economy that drives sustainable investment returns.
At the INCR conference at
the UN in May, a group of state treasurers, state and city comptrollers, public
and labor pension funds, foundations and religious institutional investors
signed a call for action, including commitments to 1) deploy $1 billion of
capital to achieve attractive long-term investment returns in alternative
energies, 2) develop investor proxy voting policies around this issue, and 3)
create a reliable global standard for company disclosure on climate risk.
As investor money focuses on
the long term, both Wall Street analysts and the companies themselves will
react. Climate change proxy resolutions,
which received less than 5% of shareholder votes a decade ago, are now
achieving more than 30% approval at energy companies like Anadarko and Apache. After a process of shareholder engagement
Cinergy, which is the country’s largest emitter of greenhouse gases and is in
the process of merging with Duke Power, has agreed to cut emissions by 5% by
2012, and has advocated for an end to the regulatory uncertainty on climate
change.
In the long run, stocks have
shown themselves to be an excellent source for wealth building in a diverse set
of countries. It is on a multi-decade
view, not a quarter-to-quarter basis, that the society and its corporations are
dependent on sustainable policies that ensure a healthy, balanced economy. A true investment horizon goes beyond
short-term speculation to encompass our lifetimes and those of our children and
grandchildren. As such, the big-picture
issues like government finance, international relations, consumer debt and
climate change policy will be the ultimate drivers of market returns. The more that owners of capital demand a
focus on the long term, the better these returns will be.
[1] CFA Institute Annual
Conference,