Controversy of Short-Termism
NEW YORK, NY., December 19, 2016 – Two research papers that have the potential to reshape investor thinking on the detrimental impacts of short-term investing have won the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition.
The winners will be presented today at the Columbia Law School’s 2016 Millstein Governance Forum, Governance, Leadership and the Future of the Corporation, in New York City. In addition, each winning research team will be presented with a $10,000 award.
“The two winning research papers get at the heart of a key issue facing the economy, investors and companies – short-termism,” said Jon Lukomnik, IRRCi executive director. “Both research papers offer important contributions to the global debate on the need for businesses to maintain a long horizon focus in a short-term world, as well as the benefits of such a long-term focus for investors and companies alike.
The two Honorable Mention winning papers also are significant in that they find that chief executive officer (CEO) pay is not linked to performance, and that greater shareholder input into corporate boards via increased proxy access increases company value,” Lukomnik explained.
The winning academic research, Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity, is co-authored by Caroline Flammer, Assistant Professor of Strategy and Innovation at Boston University, and Pratima (Tima) Bansal, Professor of General Management and Sustainability at the University of Western University (London, Ontario). The research shows that providing long-term incentives to executives – in the form of long-term executive compensation – leads to increased long-horizon investments and higher business performance. Download the research here.
“The research results clearly show that corporate short-termism is hampering business success. Firms that adopt long-term executive compensation policies show a significant increase in stock market performance and higher profits in the long run,” Flammer said. “These companies also increase their engagement in innovation and corporate social responsibility. Our research findings suggest that absent long-term incentives, executives tend to underinvest in long-view projects, which is detrimental to companies, investors, society and the environment. Moreover, the findings have relevant policy implications in terms of informing executive compensation reforms currently taking place in the U.K., the U.S., and other countries.”
The winning practitioner research paper, The ‘Science’ and ‘Art’ of High Quality Investing is co-authored by Dan Hanson, partner with Jarislowsky Fraser Global Investment Management and lecturer at UC Berkeley Haas, and Rohan Dhanuka, who previously was with the firm. The research examines the issue of “quality”. It finds that investors with a short-term focus tend to undervalue intangible assets – the kind that don’t show up on corporate balance sheets, such as the payoffs from corporate R&D spending, advertising and patent citations. Alternatively, investors and managers who take a long-term view have an opportunity to identify opportunities missed or underpriced by a world focused on the here and now. Download the research here.
“It’s not just Wall Street that chases the short-term. For all the talk about ‘long-termism,’ quantitative finance still often relies on short-term mean-reversion studies. We brought the long-term stewardship perspective that we have as investors to a study of quality and environmental, social and governance (ESG) issues, and we show that-if done right-there can be alpha in a high quality, long-term, ESG approach,” said award winner Hanson. “We are honored to be recognized by IRRCi, and we are pleased to donate prize proceeds to the Global Initiative for Sustainability Ratings (GISR) and Sustainable Accounting Standards Board (SASB), both pioneers in market-driven approaches to improving ESG disclosures.”
High Quality Opinions
Again this year, the submissions were of such high quality that the judges selected two papers for Honorable Mention recognition. The papers receiving Honorable Mention recognition are:
- Are CEOs Paid for Performance? Evaluating the Effectiveness of Equity Incentives by Ric Marshall and Linda-Eling Lee, both with MSCI. The paper examines whether CEO pay reflects long-term stock performance, and finds that it does not. It finds that companies that awarded CEOs higher pay incentive levels had below-median returns based on a sample of 429 large-cap U.S. companies observed from 2005 to 2015. On a 10-year cumulative basis, total shareholder returns of those companies with total summary pay below their sector median outperformed those companies where pay exceeded the sector median.
• On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access by Stuart. L. Gillian with the University of Georgia, and Jonathan B. Cohn and Jay C. Hartzell, both with the University of Texas at Austin. The paper examines a key issue in corporate finance – the optimal division of control between shareholders and management. The research indicates that reforms allowing greater shareholder input via increased proxy access are associated with increases in firm value for those firms in which intervention is needed and where shareholders are more likely to seek board access.
The following panel of respected judges reviewed the submissions and selected the winning papers and honorable mentions:
- Mark Anson Chief Investment Officer, Acadia Investment Management
- Collette Chilton, Chief Investment Officer, Williams College
- Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
- James Hawley, Professor & Director, Elfenworks Center for Fiduciary Capitalism, Saint Mary’s College of California
- Robert Jackson, Jr., Professor of Law and Faculty Co-Director, Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School
- Nell Minow, Governance Expert and Columnist, Huffington Post
The IRRC Institute is a nonprofit research organization that funds academic and practitioner research that enables investors, policymakers and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased and disseminated widely. More information is available here.