Sustainable capitalism hails importance of long-term investment

Early in 2012, the London office of Generation Investment Management [PDF] published Sustainable Capitalism, a document which builds upon a 2011 manifesto [PDF] authored by firm founders Al Gore and David Blood. "Sustainable Capitalism encourages us to generate financial returns in a long-term and responsible manner," the report stated, "and calls for internalizing negative externalities through appropriate pricing."

Sustainable Capitalism recommended five actions that should be adopted immediately: identify and incorporate risks from stranded assets; mandate integrated reporting; end the default practice of issuing quarterly earnings guidance; align compensation structures with long-term sustainable performance; and encourage long-term investing with loyalty-driven securities.

As a result of interest in Sustainable Capitalism, the Generation Foundation teamed with Mercer and the Canadian law firm Stikeman Elliott to convene the Loyalty Rewards Project, "a year-long collaborative global research consultation with key investment stakeholders regarding ways corporations can build long-term shareholder loyalty." A specific goal of the project was to learn the opinions of stakeholders regarding the concept of loyalty-driven securities.

The consultation resulted in a report published this month, "Building a Long-Term Shareholder Base: Assessing the Potential of Loyalty-Driven Securities." [PDF]

"The concept of loyalty-driven securities is a share structure that provides differentiated rights or rewards to a group of shareholders identified on the basis of the tenure of their shareholding," the report stated. According to the concept, long-term investors would be rewarded for their "patient capital" through such means as expanded proxy voting rights, for example. The practice could potentially "better align companies and investors with a shared focus on long-term value creation."

The report found little support among investors for the idea of loyalty-driven securities. Many argued that differentiated share classes ran counter to generally accepted concepts of good corporate governance based on one proxy vote for one share of stock. Some participants pointed to administrative complexities or the weakness of the incentives as arguments against adopting a new share class. And many investors "did not equate the problem (of short-termism) to declining holding periods" at all.

Nevertheless, "the investment community as a whole does see short-term behaviors as detrimental to good corporate governance and therefore investment performance," report co-author Jane Ambachtsheer of Mercer said. Respondents generally agreed that three areas presented as priorities: longer time horizons for investment analysis: aligned frameworks for performance measurement and reward; and stronger relationships between companies and investors.

"A more constructive relationship between companies and their long-horizon investors is required to deliver longer-term value creation," the report concluded. "If investors are going to support long-term decisions, which may take some time to pay off, they need to have faith in the strategy and also the executive team that will execute it."

"There is a growing consensus across the business and investment community that taking a longer term view inevitably creates more value," Blood said. "The challenge now is how best to harness this broad support for long termism, push forward with real and decisive actions, and ultimately create a more sustainable form of capitalism."

"The incentives for myopic leadership remain acute," said report co-author Ed Waitzer of Stikeman Elliott. "The themes that emerge from the research reflect a collective desire to get beyond aspirational talk to truly collaborating about how to address the identified challenges."

This article originally appeared at Social Funds.

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