The stock market is incredibly fickle. In the short term, stock prices can swing significantly on such short-term news as:
- What are reviewers saying about the newest, yet-to-be released iPhone?
- Will Amazon use drones for shipping?
- How many people in Latin America signed up for Netflix?
You get the drift. But for long-term investors there is quite a bit more to creating long-term, sustainable shareholder value than short-term news. If you’re not a short-term trader, standing back and taking the long-term view is important for deciding where to invest your hard-earned savings.
The National Association of Corporate Directors (NACD) has over 17,000 members that serve on Boards of publicly traded, for-profit private and non-profit organizations. It is the world’s leading association studying regulations and how they are applied, and recommending best practices for Boards of Directors to apply corporate governance.
At their annual meeting this week NACD released its newest report The Board and Long-Term Value Creation created by its Blue Ribbon Commission of leading Directors. Succinctly, the report calls on all Boards to help management overcome myopia around short-term results, and increase attention on creating long-term value.
Most metrics used in business are very short-term, including sales, volume, costs and margin. The report points out that at most companies long-term compensation is defined as 3 years or less — shorter than most new product development programs or even new branding or image creation programs. Unfortunately, this can lead to spending too much time on tactics and machinations to drive short-term reporting, hoping that the long-term will simply take care of itself.
“Instead of viewing short-term results and long-term strategy as mutually exclusive, boards and executives should view them in terms of degrees of alignment,” said Karen Horn, co-chair of the NACD Blue Ribbon Commission; vice chair of the NACD board; and director of Eli Lilly & Co., Norfolk Southern Corp., Simon Property Group, and T. Rowe Price Mutual Funds. “It should be possible to draw a clear line from the company’s day-to-day activities to its long-term objectives.”
“Board agendas need to accommodate sufficient time for substantive discussions about long-term opportunities and risks, rather than being dominated by backward-looking reviews of past performance,” said Bill McCracken, co-chair of the NACD Blue Ribbon Commission, former CEO of CA Technologies, and director of MDU Resources and NACD.
The report notes that short-term pressures on management are greater than ever. But Boards can take measures to bring the focus back on long-term value creation by actively engaging in various activities, such as:
developing long-term strategy,
reviewing capital allocation process and where money is invested,
careful consideration of management incentives including compensation,
applying oversight to corporate culture,
participating in communications with analysts, investors, and other constituencies.