Global directors’ urge business to take a longer-term outlook

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, John Colvin.

"Directors should consider developing and disclosing a clear framework for managing long-term value creation and curbing excessive short-termism,” Mr Colvin said.

Ansie Ramalho, 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.”

Another symptom 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.[1] "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 organisations.

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 short-term remuneration.

"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.