Policy

Short Termism and Corporate Performance

The private sector is the “commercial engine room” and wealth generator of the nation. Maintenance of its health requires corporate initiatives and investment strategies which by their nature are long term in their planning and execution.

This contrasts with the pre-occupation of some in the investment community with the short-term performance of companies often induced by their rewards systems that focus on a short period of performance measurement, for example, quarterly. In turn this leads to concerns that an excessive focus on short-term performance is creating a climate of risk aversion and focus on delivering short-term performance to meet expectations, this will tend to shift focus away from long-term sustainable value creation for shareholders. It is important for the economy that short-term performance of companies is assessed in the context of progress towards them achieving their long-term objectives.

The Group of 100 believes that gaining sensible outcomes regarding the measurement of company performance is a question of balance. Currently it could be argued that balance is skewed towards meeting short-term expectations at the expense of longer term sustainable gain.

The Group of 100 believes that companies should be aware of the pervasive effects of short-termism and implement practices to minimise its influence and focus attention on the progress towards achieving long-term objectives. For example by:

providing regular communication to shareholders that focuses on the consistent creation of long-term shareholder value and the way in which current performance reflects progress towards achieving those objectives; and
ensuring that employee compensation schemes and incentive plans are designed so that rewards are aligned with progress towards achieving long-term objectives (and that they do not reward short-term outperformance).

The Group of 100 considers that the continuous disclosure regime and half-yearly reporting serve to provide shareholders and the market with a regular flow of relevant information to assess the performance of a company and its success or otherwise in meeting its long-term objectives.

The Group of 100 does not believe that providing more information more frequently, for example quarterly reporting, necessarily serves the best interests of shareholders and market participants.

Tom Honan
National President

July 2005

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