Regional Perspectives on Long-Term Value Creation

A group of corporate and investment leaders convened in Santiago, São Paulo, and Singapore to discuss the roadmap for focusing capital on the long term, identify how short-termism manifests itself in particular economies and solicit ideas for how local businesses and investors can enhance their long-term focus. The sessions in Santiago and São Paulo were co-hosted by CPPIB and McKinsey & Co, with CPPIB and GIC acting as co-hosts for the session in Singapore.

Key highlights from these round-tables include:

Short-termism is an issue with broad relevance: Participants challenged the popular notion that Asia is more long-termed focused than the rest of the world. Instead they suggested that Asia is similar to the rest of the world when it comes to short-termism. For example, median CEO tenure in Asia (at ~ 4 years) is similar to that in the rest of the world. Participants agreed that short-termism is a growing problem in Chile, and that now is an optimal time to focus on what the business community can do to address these challenges. The volatile macro situation in Brazil, including high interest rates, has created impediments to a longer-term focus due to an emphasis on short-term capital structure health and a higher cost of long-term capital.

Corporate structure has an impact: Participants cited family ownership and controlling shareholders as an intrinsic force for long-term thinking among Brazilian companies. Although the principles of long-term value creation are universal, Asian companies might need to adopt nuanced/tailored approaches that accommodate their diverse corporate structures. For example, a significant percentage of Asian companies are still state‐owned/influenced and/or founder-/family- controlled/influenced.

Country-specific characteristics influence market dynamics: Many participants saw Brazil as unlike other Latin American countries, and perhaps more like the United States, with large, “continental” domestic markets and globally-oriented investors. In the case of Chile, participants believed that it has many intrinsic strengths that have made it relatively long-term oriented: the prevalence of controlling shareholders; the size and influence of industries with long-term investment cycles; a small, close-knit business community; and a relatively stable regulatory environment. Similarly, China was highlighted as an economy that has not had a long-term investing philosophy. According to one participant, China has two distinct characteristics: (1) there is a large retail investor presence which accounts for 70-75% of capital flow; and (2) half of all assets are owned by the state (accounting for the highest percentage of state-ownership in major markets).

Corporate boards are crucial stewards of long-term value creation: Participants universally agreed that corporate boards are an important lever for enhancing companies’ long-term focus, but they face structural and cultural challenges that must be addressed. Better corporate governance is necessary to ensure appropriate checks and balances.

Institutional investors can be a force for long-termism: Participants believed that Brazilian institutional investors, including pension funds, have been a surprisingly positive force for long-termism, given their concentrated portfolios and leadership on governance issues—but this may change in the near future. In the case of Chile, participants highlighted the short-term focus of pension funds, the influence of the commodity boom-bust cycle, unbalanced board composition, misaligned management incentives, and cultural attitudes as primary causes of short-termism in Chile. In Asia, participants stressed that investors that fundamentally understand the assets in which they invest and take a long-term view can be rewarded handsomely. They also highlighted the benefit of having a single major long-term focused shareholder that shares and supports the board and management’s vision, unlike short-term shareholders who tend to churn their stock as they do not share the company’s motivation.

CEOs need to set and ‘sell’ a long-term strategy: In Asia, participants agreed that corporate management needs to decide what sort of shareholder they want/need to attract. Corporations need to engage the right set of institutional investors that share their vision for the company and understand the company’s business, its underlying strategy and its actions. One participant even suggested that CEOs should not be allowed to sell their shares in the company while they are at the helm. To further ensure that they have a vested interest in adopting a succession plan that ensures the long-term success of the company, he suggested that CEOs not be permitted to sell their shares until at least five years after leaving the company.

Both incentives and disincentives matter: Participants highlighted the importance of both incentives and disincentives stressing that short-termism is not a financial problem, it is a human behavior problem. Ultimately, what gets done is what gets measured and rewarded. Personnel turnover also poses a significant problem to maintaining a long-term focus. Better compensation structures could be the key to helping ensure longer-term tenures (and hence, outlooks) at investment funds.

It is crucial to keep the end beneficiary in mind: Participants agreed that in order to ensure individual savers get the long-term financial returns they need and deserve institutional investors and corporate boards should ensure their voices are heard.

Overall, participants expressed a clear desire to continue the discussion of long-termism in Asia and Latin America, including a call for further research and analyses on long-termism to help regulators and policy-makers frame regulation with a fuller understanding of the often unintended consequences.

The views represented in this summary are those of session/round-table participants and do not necessarily reflect the views of the Focusing Capital on the Long Term initiative or its member organizations.

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