Global Managing Director
McKinsey & Co.
Society is missing out on long-term growth, increased innovation, and a more inclusive capitalism due to destructive short-termism and under-investment across the investment value chain. Enabling more long-term investment is the single action that would make the biggest difference in achieving a more inclusive capitalism. Unfortunately, we face a daunting collective shortfall.
Globally, long-term investment collapsed during the last recession and has not recovered. Across advanced economies, real private business investment has fallen by 10-25% from the highs achieved in 2007.
The world economy needs bold investments: $57tn in the next 15 years on infrastructure alone, according to the McKinsey Global Institute. Investment is essential to stimulating long-term growth, creating jobs, enhancing global infrastructure, reducing ecological degradation and overcoming some of our most pressing societal challenges. Yet, what we see instead is that short-termism has become the norm in our capital markets.
With more than 70 percent of a typical company's value coming from activities that will take place three or more years in the future, businesses, governments and investors need to make bold, profitable long-term investments.
The best place to begin is for long-term asset owners to act and invest in a way that creates sustainable value for both current and future stakeholders. With Canada Pension Plan Investment Board President and CEO Mark Wiseman, and BlackRock Chairman and CEO Larry Fink, I co-chair the Focusing Capital on the Long Term (FCLT) initiative. Together, we have developed a four-part framework for addressing the issue:
1. Reorient the portfolio strategy and management of institutional investors to ensure: (i) clearly articulated investment beliefs; (ii) comprehensive statements on risk; (iii) longer-term benchmarks that speak to investment beliefs and strategies; (iv) improved evaluations that lengthen the period over which qualitative and quantitative aspects are assessed; and (v) mandates that align asset owner and management expectations and behaviour.
2. Unlock value through engagement and active ownership by: (i) supportively engaging in constructive discussions with large, passive and active holdings; (ii) focusing on activities directly tied to long-term value creation; and (iii) supporting companies that face short-term threats if management presents sound plans and processes for long-term value creation. The world economy needs bold investments.
3. Improve the dialogue between investors and corporates through: (i) ensuring that corporates develop and communicate compelling long-term strategies; (ii) measuring long-term value creation and performance relative to a set of metrics specific to the company's strategy and incentives; and (iii) reporting to and engaging with the right long-term investors over an extended period through one-on-ones, investor days, financial reports, and earnings communication.
4. Shift corporate boards' focus to support long-term strategy and sustainable growth by: (i) selecting the right directors to ensure diversity of opinion and proven experience in building relevant businesses, as well as deep functional expertise; (ii) spending more quality time fulfilling duties and allocating a larger portion of that time to discussing long-term strategy; (iii) engaging key directors with long-term investors through discussions on long-term strategy and metrics, not just compensation; and (iv) paying directors more, especially for long-term performance (ideally putting in place an incentive structure that requires directors to have a significant equity stake for an extended period of time and significantly reducing cash payments).
Taken together, these actions will enable more long-term investment, a shift the world desperately needs to help create a more inclusive capitalism.