by Christina Rehnberg, George Serafeim, Brian Tomlimson
Republished from Harvard Business Review, September 19, 2018
Many people have suggested moving away from quarterly earnings reporting as a way to reduce short-termism. But such a change would probably not change how resources are allocated or businesses operate. Rather than requiring less short-term information, we believe the key to combating short-termism is to encourage companies to share more information about their long-term plans.
When asked why companies don’t talk more about the long term, CEOs often complain about the short-term orientation of investors. Similarly, investors complain that companies don’t disclose enough long-term information for them to work with. This conundrum is finally being tackled by the Strategic Investor Initiative of CECP, a CEO-level organization where one of us works. CECP has created a framework for CEOs to present the long-term strategic plans for their companies and hosts CEO Investor Forums in which to do so. To date, 19 CEOs of S&P 500 companies — such as Becton Dickinson, AETNA, 3M, PG&E, and Unilever — have presented their plans to institutional investors representing in excess of $25 trillion in assets under management. Tomorrow, another three companies — IBM, NRG Energy, and GSK — are presenting their long-term plans. The expectations for an effective long-term plan are described in SII’s Investor Letter to CEOs. Signed by leading institutional investors, the letter describes the components of a long-term plan that enables a CEO to address enduring issues of investor interest and help plug an unmet market need for information with a long-term time horizon.
CEOs have shown leadership in presenting these long-term plans; however, to date, we have not had evidence on the capital market consequences that the presentation of a long-term plan may have. We have been asked by presenting companies, those considering presenting, and other stakeholders to demonstrate real-world impacts from delivering these plans — the “what’s in it for me?” argument for why a company should deliver a long-term plan.
Given this, CECP partnered with KKS Advisors, an advisory and research firm where one of us works and the other is cofounder, to explore the information content of these plans, create a framework analyzing the content of the reports, and examine how capital market participants respond to them. Given the limited sample we have to analyze, we consider our results preliminary. However, they provide important early evidence and can be used in the future as an anchor in analyzing even more companies, as well as the long-term effects from the presentations of these plans. We collected all company strategic plans that have been presented at the CEO Investor Forum over the past four events and analyzed the subsequent returns and trading volume to understand whether there are abnormal movements in the market on the day of the event and the three-to-five-day window following the event.
We find larger capital market reactions both for stock prices and trading volume for the three and five days after the presentation of the long-term plan, compared to the typical reactions on other days, suggesting that the long-term plans communicate new information that market participants did not have before. These data also suggest that long-term plans are not mere marketing presentations or “cheap talk.” However, we find no increased propensity for Wall Street analysts to revise their forecasts in response to a long-term plan, consistent with such analysts being primarily focused on the type of short-term financial results typically delivered through the earnings call. Despite the latter finding, larger capital market reactions for both stock prices and trading volumes during the course of the event suggests that the information presented during the event is new and value-relevant for investors — that is, they are acting on it. As such, the long-term plan can be a valuable addition to the investor relations’ tool kit to enable CEOs to effectively communicate with structurally long-term investors.
We have also analyzed the content of each of the long-term strategic plans delivered at the CEO Investor Forum according to an analytical framework based on SII’s Investor Letter to CEOs, hundreds of pieces of investor feedback, and the work of collaborative initiatives, such as FCLT’s 10 elements of a long-term strategy. We then scored the quality of disclosure based on whether there is no disclosure, generic disclosure, backward-looking metrics, or forward-looking metrics for a category. A good long-term plan provides the investor with forward-looking metrics on several issues — not a generic narrative based on backward-looking information. The categories include 22 specific issues grouped into nine distinct themes: financial performance, capital allocation, industry and mega-trends, competitive positioning, risks and opportunities, corporate governance, corporate purpose, human capital, and strategic partnerships for long-term value creation.
This framework helps us analyze the content of each long-term plan presented to date — and gives us the basis for analysis of future plans. For example, plans for Becton Dickinson and Medtronic score at the top of the distribution. They are rich, specific, and actionable. Companies seem to find it easier to disclose more forward-looking metrics on themes such as competitive positioning (long-, medium-, and short-term value drivers), trends (sources of competitive advantage), and financial performance (capital efficiency and profitability). By contrast, forward-looking metrics were rarely provided for issues underlying the corporate governance theme. In fact, 58% of companies provided no information on executive compensation and how it is linked to the long-term, and 53% of companies did not disclose anything on their board composition.
Our analysis suggests that companies disclosing more actionable information around competitive positioning, corporate purpose, and the strategic partnerships in their corporate ecosystem had significantly larger market reactions than other companies when they shared their long-term plans. This suggests that, to an extent, plan content (as captured in our framework) does correlate with the capital market reactions to these plans.
We hope that this evidence will start a much-needed discussion among more CEOs to present their own long-term strategic plans, and kick-start a significant reframing of the way companies report and investors consume and act on information. We will continue analyzing the content of these plans; build a database of long-term plan content as a resource for companies, investors, and researchers; and continue to enable leading CEOs to develop best practices in delivering long-term plans. Every publicly listed company should deliver a long-term plan as part of reorienting our capital markets toward the long term.