IR30: A look back at March 2012 – Arguments about short-termism
The specter of short-termism is seen as a major modern evil of the capital market system. In this way it is at the heart of what needs to be corrected in the investment sphere according to the UK regulator the Financial Reporting Council’s new Corporate Governance Code.
IR Magazine March 2012: Light at the
After the financial crisis Mark Carney, the governor of the Bank of England, put bankers on a warning for short-termism, stating that this focus would need to change if faith in financial institutions were to improve.
In a similar timeframe analyzing short-termism, the March 2012 IR Magazine attempted to discover whether it was in fact the great weight on the market system, with Neil Stewart’s piece entitled: How bad really are volatility and short-termism?
The first point was how things have changed within the market system itself. ‘We’ve gone down the rabbit hole. We’re trying to act as though things have not changed, when all around us everything is completely and utterly transformed and distorted,’ declared Tim Quast, founder of ModernIR in Denver, Colorado at the time.
The piece noted presciently: ‘The feeling is that in place of shareowners, the market has been hijacked by traders – price takers, not price makers.’
With much talk at the time about the negative impact of high frequency trading (HFT) publicized in the Michael Lewis book Flash Boys, the piece noted that: ‘Despite rising trading volumes, the average institutional capture rate – the proportion of an issuer’s trading volume involving long-term investors – is back to pre-crisis levels for US stocks…And HFT made a lot of noise in times of great volatility but overall it’s not getting any worse. It may even be drying up a bit as new entrants chip away at the space.’
Therefore, for IROs, the portfolio turnover of the world’s active equity managers had steadied to a level below where it was in 2007 – before the US housing collapse and all that ensued.
Other concerns have not proved to be accurate, with some experts believing high volatility may be the ‘new normal’, a state the market slipped into some time in the ‘last decade’. A New York Times study cited in the piece found that since 2000, 4 percent daily moves in the S&P 500 have happened six times more than on average in the four previous decades. The corrupting assumption here has not been borne out by time.
Nevertheless for IROs frustration had occurred because of record-high correlation, with stocks moving almost in lockstep with indices regardless of their fundamentals.
‘Dating back to the financial crisis, so much of the discussion with investors has focused on macroeconomic concerns, companies don’t think they’re getting their story across effectively unless it’s connected to a particular macro story,’ noted Chris Taylor, then head of global investor relations services at Ipreo now vice president of listings and services at the NYSE, in an observation that could be said to be true today
‘The perception of short-termism is further augmented because the sell side is driving companies toward the highest-turnover investors,’ suggested Adrian Rusling, partner at Phoenix-IR in Brussels. Whether this is still applicable in a post-Mifid II world is open to question.
Interestingly, looking back several years Mike Haase, then vice president of investor relations and treasury at VMware, now vice president of finance at Workday, noted he had seen many traditional, long-only investors gradually take a shorter-term view. ‘But even if their average holding period has come down, they’re still a lot longer term than momentum investors, hedge funds and so on,’ he said back in 2012. ‘The gap is smaller but still meaningful, and the IRO’s role in targeting the best shareholders is all the more important.’
The CFA Institute and Business Roundtable produced a report titled Breaking the short-term cycle in 2006, recommending an end to earnings guidance and a switch to longer-term incentives and, looking back, the surprise is how little things have changed.
Recognizing the obstinacy of short-termism, the CFA Institute had, six years later, worked on a follow-up model. ‘We want to focus on what boards and management can do in the face of these pressures,’ said Matt Orsagh, the CFA Institute’s director of capital markets policy. They have to manage for the long term, and they have to communicate that long-term strategy. I’m surprised it doesn’t seem to be happening as much as I would have expected.’
This last statement could sum up the approach to short-termism very well.
As the current debate around short-termism shows, the points raised in the 2012 IR Magazine piece have not really been satisfactorily resolved. Whether they truly can, given the nature of the capital markets, is a moot point in itself. It also worth remembering the famous dictum from the economist John Maynard Keynes: ‘In the long-run, we are all dead.’
As IR Magazine builds up to its 30th anniversary issue – the upcoming winter 2018 issue, which will be the 279th edition of the industry’s flagship magazine – we’ll be posting throwbacks to old covers, revisiting some of the hot topics from the past 30 years of investor relations and hearing from some of the industry titans.