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September 18, 2009

Aspen Institute Calls for End of Short-Termism by Business and Investors
    by Robert Kropp

In citing benefits to society of long-term business and investment strategies, report incorporates terms often utilized by socially responsible investors. -- The Aspen Institute, which defines its missions as fostering "values-based leadership, encouraging individuals to reflect on the ideals and ideas that define a good society," created its Corporate Values Strategy Group (CVSG) in 2003, "to reevaluate business practices leading to malfeasance and short sighted decision-making in business."

"We started convening people on this shortly after Enron," said Judith Samuelson, the Executive Director of the Business and Society Program at the Institute, referring to the energy company whose bankruptcy came on the heels of systemic accounting fraud.

In 2007, the Institute issued a report entitled Long-Term Value Creation: Guiding Principles for Corporations and Investors, in which the organization defined what it calls the Aspen Principles. While the language of the document did not specifically embrace the priorities of the socially responsible investing (SRI) community, the principles it espoused do align with those of SRI advocates.

To define the metrics of long-term value creation, for instance, the report called on companies and investors to de-emphasize short-term metrics and instead use industry best practices "to maximize future value (even at the expense of lower near-term earnings) and to provide the investment community and other key stakeholders the information they need to make better decisions about long-term value."

Among the elements that are critical to successful communication between companies and long-term investors, according to the report, is frequent communication on business strategy and "outlook for sustainable growth." Finally, the report called for the alignment of compensation policies with long-term metrics, and included recommendations found in shareowner resolutions that have been introduced by SRI institutional investors for many years.

This month, the Institute issued a policy corollary to the Aspen Principles, entitled Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, which, according to the Institute, "builds on the CVSG's ongoing focus on sustainable value for investors and society." As with its earlier report, the Institute does not specifically embrace the call for greater reliance on environmental, social, and governance (ESG) considerations in the development of long-term business and investment strategies. However, through the use throughout the report of such terms as "responsible" and "sustainable", an alignment of values with those of the SRI community seems at least strongly implied.

Prior to joining the Institute in 1998, Samuelson directed the social investment fund for the Ford Foundation, where she oversaw Program-Related Investments for rehabilitation of low-income housing, revitalization of rundown neighborhoods, and the creation of jobs. As she told, "I came out of social investment. And if you look at the Institute's mission statement, this is why we do this. We're about global sustainable business leadership."

"Companies are a very important force in addressing our most important problems," Samuelson said. "Managing from quarter to quarter does not allow for focusing on the long-term consequences, or the opportunities for investing appropriately for the things that are critical for a long-term favorable business climate and a favorable future."

The consequences of short-termism, according to Samuelson, include "shorting research and development, and participating in inward-focused short-term policies that do not provide long-term good for society."

Overcoming Short-termism focuses much of its attention on the role of institutional investors, because, according to the report, "Encouraging investors and intermediaries representing investors to adopt a long-term perspective will ultimately encourage and empower boards of directors to adopt long-term strategies for growth and sustainable earnings." The report provides three key leverage points to counter what it indentifies as a system-wide failure to adopt long-term considerations.

The first leverage point, to develop market incentives that encourage "patient capital," aims to discourage the practice of churning by intermediaries who may be incentivized by such short-term considerations as commissions on the number of trades they make. The report also suggests the adoption of minimum holding periods or time-based vesting, in return for the enhancement of shareowner participation rights.

While the report does not define "patient capital," the term has been adopted by many in the SRI community to denote long-term investments that take ESG factors into consideration.

The other key leverage points advocated in the report are enhanced fiduciary responsibilities on the part of financial intermediaries, and greater transparency in investor disclosures. "Institutional investors now wield substantial power," according to the report. "The maturation of the institutional investor community creates both opportunity and responsibility… to pursue investment policies and public policies that empower and encourage business managers and boards of directors to focus on sustainable value creation."

"The pressures that companies feel from institutional investors who have short-term horizons are part of this vicious cycle," Samuelson observed. "One of the primary leverage points is better disclosure by intermediaries as to what degree their employees are incentivized to serve the investor well."

"What are the hallmarks of successful companies?" asked Samuelson. "Market value, business opportunities, the morale of employees, and their relationships with stakeholders. Getting away from strictly financial considerations, and getting way past short-term financial metrics."

"Focusing on short-term share prices is not likely to provide a wide enough lens," Samuelson continued. "When long-term time frame is considered, it becomes a place where different actors are at the table, and leads to a different kind of conversation. Time frame is central to all of the ESG pieces. Time frame brings ESG actors to the table, as well as a wider group of voices."

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