CEOs are increasingly frustrated by the short-term orientation of investors. They say markets underappreciate long-term investments and ignore issues like employee and customer welfare, while pressuring companies to make decisions that maximize short-term earnings and stock prices. CEOs are perhaps right that some investors are short-term oriented and, as a result, damage the long-term success of businesses. However, according to research by our organizations – KKS Advisors and The Generation Foundation – few CEOs are providing materially relevant information to investors that would encourage long-term oriented capital allocation.
So while CEOs may be increasingly airing their grievances about so-called quarterly capitalism, most have so far done little to change it. One aspect of long-term thinking is attention to environmental, governance, and social risks, and that’s where our research has focused.
In our recent report we analyzed the conference call transcripts and reporting practices of 20 companies across four industries to understand the
to which companies are providing sustainability-related material information to investors. Furthermore, we investigated the extent of material information provided by each company across their conventional reporting instruments by evaluating their corporate reports, the presentation section of their investor conference calls, and the Q&A section of each call. We coded the reporting practices of each company, and ranked them based on the sustainability-related information that they reported.
In contrast to the popular notions that companies are releasing a wealth of valuable information, we found that the presentation sections of the calls, led by CEOs and other top executives, showed a deficit of information relevant to the long-term strategy of the organization. Instead, the emphasis of the presentation sections was on short-term financial results. This is not because companies lack of metrics for environmental, social, or corporate governance goals (ESG). In fact, contrary to the presentation section of the conference calls, we found that a variety of ESG metrics, material to the firm’s long-term strategy, were discussed in companies’ corporate reports. Perhaps even more interesting was that discussion around long-term strategic information emerged more frequently during the Q&A section of the call, and discussion around this information was initiated by analysts.
In other words, companies collect data on ESG metrics, but they don’t talk about them on earnings calls. Instead, it’s the analysts who turn the conversation to non-financial questions about a company’s longer-term strategy.
When we drilled deeper into who specifically asked these questions around long-term strategy, we found that a small subgroup of analysts was consistently initiating these conversations. These were not niche or specialized analysts concentrating on socially responsible investing; rather, these were the top ranked analysts by industry, according to established rankings platforms such as the one published by Institutional Investor. For example, within the Commercial Banks industry, amongst all ESG-related questions, 44% of these came from top-ranked analysts, who represent just 13% of all analysts. Top analysts are differentiating themselves by searching out pieces of value-relevant information, including ESG-related concerns. This should sound alarm bells for the rest of the analyst community who are lagging behind in their pursuit of material ESG considerations.
CEOs can’t expect to attract long-term capital if they never talk about the long-term. They need to proactively articulate to investors during the presentation section of investor conference calls the “path to long-term value” and explain the key performance indicators that are leading indicators of future financial performance. Corporate leaders need to set their long-term targets against those KPIs and periodically communicate progress towards them; this process would ensure that short-term regular earnings guidance is replaced by long-term “Integrated Guidance,“ the provision of forward-looking information around all types of capital (i.e. human, natural, financial, and social).
The movement towards sustainable capitalism demands enhanced reciprocity between business leaders and the investment community. CEOs who wish for more long-term oriented markets ought to provide material long-term strategic information to investors. Investors looking for long-term returns should evaluate and incorporate this value-relevant information into their models.
Our report shows that progress has been made and that enhancing communication practices through Integrated Guidance promotes efficient capital allocation and generates better results for both companies and investors. But CEOs can do more. The question of long-term value shouldn’t be left to the analysts.