How Long-Term Investors Influence Corporate Behavior

In his recent letter to CEOs, Larry Fink, CEO and chairman of the mutual fund giant BlackRock Inc., based in New York City, repeated his call for organizations to share their strategies for creating sustainable value. He also added a new admonition to contribute to society or risk losing his company’s support.

This norm-shifting language regarding the corporation’s purpose, which is moving away from the profit-maximization (at any cost) model, reflects a growing dissatisfaction among long-term investors with (1) the impact of short-term-focused equity markets on returns and society; and (2) the current system of corporate-shareholder communications, i.e., the quarterly earnings call, which underrepresents the long-term perspective. A coalition of investors led by William McNabb III, board chairman of The Vanguard Group Inc., has responded with a letter to CEOs encouraging them to operationalize this broad call to action from investors to share long-term thinking.

More and more large public companies are responding to the increasingly vocal demands of long-term investors for information about their company’s long-term plans (meaning at least five years). In the last year and a half, 19 companies, representing well in excess of $1 trillion market cap, have delivered investor-facing long-term plans to audiences of key long-term investors. At one recent forum for CEOs and inventors, CEOs from Unilever, UPS, Johnson & Johnson, Merck, and Medtronic presented their company’s long-term plans.

These efforts are just a start toward reorienting capital markets so that corporations and investors can hold meaningful conversations about long-term value creation. We need a new venue and a new long-term-focused accountability environment for both communicating long-term plans and rebalancing disclosures within the existing call framework so that they include more content about the long term. With respect to the latter, the health care company Becton, Dickinson and Co. (BD), based in Franklin Lakes, New Jersey, has taken significant strides. In its most recent earnings call, BD provided extended commentary on its long-term strategy and other sustainability disclosures, working to change the complexion of this closely scripted event.

Corporations use various investor relations, disclosure, and engagement strategies to communicate with their investors. Yet the existing system of corporate communications with shareholders does not meet the informational needs of long-term investors. So how should managers adjust it? An investor-facing long-term plan provides part of the answer to this question. The long-term plan has a different audience, time horizon, subject focus, and set of metrics when compared with the typical quarterly earnings call — and no equivalent venue exists within the existing schedule of corporate communications. It gives a corporation an opportunity to communicate the essence of its strategic plan to its investors in a way that is useful to those investors. It may also enable long-term investors to support the implementation of the plan laid out by management and help shield strategy from short-term market pressures. Corporate leaders need to reflect on the following critical elements when discussing their long-term plans with long-term investors.

Elements of a Long-Term Plan

• Growth: The minimum time horizon for a long-term plan is five years forward. Projections in this time frame differ radically from forward-looking information delivered on a quarterly earnings call. The content of these plans should include some reference to how the company will grow and address material sustainability issues. Some organizations, such as the Sustainability Accounting Standards Board, have identified material sustainability issues for companies to work into existing disclosures. Leaders can use these frameworks to help them establish long-term goals, metrics, and milestones against which their companies may be held accountable. Any useful framework will deepen the understanding of the company and management’s view of the future, often helping to build new operational processes within the business.
• Strategy: When discussing the long term, CEOs must include the board of director’s role in enabling the strategy set out in the long-term plan. For instance, what is the board’s role in creating and overseeing the achievement of long-term goals? How will the board’s composition (in terms of both skills and diversity) and the structure of executive compensation contribute to the achievement of these goals?
• Risks: Talking meaningfully about the long term means talking about the major risks and megatrends that will affect the business. Corporate leaders will need to explain how they identify, and will manage, these risks. When delivering long-term plans, CEOs have discussed megatrends such as the transition to a low-carbon economy in the context of utilities, aging populations in the context of health care, and AI in the context of automotive. Each trend involves vast market shifts in both consumer demand and the nature of the supply chain. An outgrowth of all these elements is how a corporation prioritizes its use of capital to address these megatrends and risks and to implement its strategy over the long term.

Communicating long-term plans to investors helps fill a structural gap in our capital markets. These investor letters speak to broad-based, investor interest in understanding a company’s long-term strategy, governance, and risks. Long-term plans are a valuable solution. They provide corporate leaders and investors with a platform to deepen their mutual understanding of the business, its prospects, and the managerial approach to key strategic issues. Over time, we expect the long-term plan will become a fixture in regular corporate communications with investors.