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The Role of Institutional Investors in Curbing Corporate Short-Termism

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The Role of Institutional Investors in Curbing Corporate Short-Termism

Brookings Institution,

5 min read
5 take-aways
Audio & text

What's inside?

Activist minority shareholders loudly press corporations to bump up short-term earnings, but that approach often endangers long-term value creation.

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Editorial Rating

9

Qualities

  • Analytical
  • Innovative
  • Well Structured

Recommendation

“Corporate short-termism” – the penchant of markets, investors and the media to score corporations strictly by their quarterly earnings reports – keeps publicly traded companies from creating sustainable long-term value. Minority-owner hedge funds loudly press for stock price boosts, while majority-owner institutional investors remain largely silent, failing to exercise their ample ownership clout. Finance executive Robert C. Pozen offers ideas on how to battle corporate short-termism in this instructive article on a topic that receives much less coverage than it deserves. getAbstact recommends it to anyone concerned about the impacts of short-term corporate decision making.

Summary

Publicly traded companies are saddled with “corporate short-termism,” the tendency of markets, investors and the media to focus on quarterly earning reports. A survey of CFOs found that the majority would waive investing in future projects to meet that quarter’s estimates. Activist hedge funds, typically with only a 1%–2% equity stake in a company, can force through share buybacks, spin-offs and dividend increases, while demanding a place on the board of directors. But they only succeed with the acquiescence of institutional investors such as pension funds and mutual funds – the majority...

About the Author

Robert C. Pozen, a nonresident senior fellow at the Brookings Institution, is a former chairman of MFS Investment Management and a former vice-chairman of Fidelity Investments.

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