Global directors’ urge business to take a longer-term outlook
08 July 2014
An international network of directors’
institutes of which the Institute of Directors in Southern Africa (IoDSA) is a founding member has called on corporate decision makers to
abandon short-term perspectives and objectives in favour of longer-term considerations
that will produce more sustainable outcomes.
The Global Network of Director Institutes (GNDI) argues in a new paper released today that excessive
short-termism may lead to reduced shareholder value and returns over the
longer-term as result of the following:
- Missed opportunities
to create enduring value for a company and therefore its shareholders.
- Under-investment in
value-creating opportunities such as research and development.
- The rejection of
long-term projects, or projects with high build or sunk costs, including
infrastructure and high-tech projects.
"Boards need to think about strategic decisions in the context of the
long-term financial health of their companies There are occasions where it is
best to reject actions that will produce short-term gains at the expense of
longer-term interests of a company and its shareholders,” said chair of GNDI,
"Directors should consider developing and
disclosing a clear framework for managing long-term value creation and curbing
excessive short-termism,” Mr Colvin said.
CEO of the IoDSA, concurs. She points to the long-term reputational damage
suffered by companies in the construction industry who pursued profits by
taking part in illegal collusion. "Those companies made high profits over the
short term, but in the end they had not only to pay hefty fines but suffer
severe brand damage that will take them years to overcome,” Ms Ramalho says.
"Warren Buffet is right when he says it takes 20 years to build a reputation
and five minutes to destroy it.”
of the disease of short-termism is that while the JSE has been delivering
superb returns over the past few years, South Africa’s spend on research and
development (R&D) has declined steadily over the past four years. "R&D is the pre-eminent investment in the future, and without it
our companies and country will not be competitive,” Ramalho argues. "And yet
the figures would seem to suggest that many companies are favouring their
quarterly earnings results over laying down the foundations for long-term
prosperity. Boards need to factor this issue into their planning, and consider
shareholder and stakeholder value over a longer time horizon.”
GNDI was founded in 2012 and brings together 10
member-based director associations from around the world with the aim of
furthering good corporate governance. Together, the member institutes
comprising the GNDI represent more than 100,000 directors from a wide range of
The new GNDI paper sets out are some suggested practices, which extend
beyond minimum regulatory requirements, that boards of listed companies could
adopt to help foster longer-term value creation. These include:
- Setting forward-looking strategic goals and implementation plans
that are properly monitored.
- Reporting practices
that disclose short-term performance in the context of medium and
long-term goals and strategies.
Executive remuneration that is
based on long-term performance measures to avoid excessive weighting of
"Many member countries of GNDI have taken steps
to foster better long-term decision making in the corporate world. GNDI
supports these efforts to curb excessive short-terms and encourages business
leaders to remain committed to producing sustainable outcomes to the benefits
of all stakeholders,” Colvin said.