“The world would be a better place if businesses stopped thinking so much about short term results and focused more on the long term” was the view of Harvard Business Review editor Adi Ignatius in January 2014. The same is sometimes said of the investment management industry and the clients it invests money on behalf of.
Taking a longer term approach to investment practices can offer many benefits. Longer term thinking by investors should encourage companies to think about the long term when they make decisions, which should in turn usher in better long term performance of the business and growth that will last.
The problem of short termism
In a world of ever faster information flow – of real-time news and social media – it is no surprise that businesses have been shortening their time horizons. Innovation and the ability to utilise technology in a data rich environment have allowed financial institutions, many of whom trade based on short term data signals using technology many times faster than the blink of an eye, to have growing influence over how financial markets operate.
The shorter term perspective of some involved in the financial markets is believed to be contributing to higher stock trading turnover, confusing fluctuations in the market and can be evidenced in the steadily decreasing time that investors own or hold shares. As a result, this can make it increasingly challenging for Boards and their shareholders to understand what is really going on. Whilst a short term horizon is the core to some legitimate market activity, it could potentially lead to negative consequences in the long term to society as a whole and undermine economic growth.
Promoting long term, responsible and sustainable investment mandates
To achieve a real change, the roles and approaches of every person involved in the investment chain must be considered. Policymakers and regulatory bodies should address the barriers and obstacles that hinder investors from taking a longer term perspective. Proposing guidelines to promote long term thinking in governance and portfolio management could be a good start. The private sector also has an important role to play in encouraging new ways of thinking on long term responsible investment.
The economic imperative for action is clear. Low levels of long-term capital investment in the UK contribute to low workforce pay and hinder productivity, one of the greatest drags on the British economy. If government, business and finance are able, collaboratively, to create a culture where the long-term stewardship of assets is celebrated, with investors and investee companies recognising their shared interest in long-term success, the potential economic benefits are great.
The good news is that work to this end is already underway, with institutional investors and policymakers clear that long-term capital is an important pillar of long-term growth and business competitiveness.