The Long-Term Imperative: How Companies Can Respond

By Brian Tomlinson Research Director, Strategic Investor Initiative, CECP

On November 7, 2019, Chief Executives for Corporate Purpose (CECP) and Edelman hosted a webinar titled Communicating Long-Term Plans: Best Practices and Examples from the Industry, which can be accessed here. The combined Strategic Investor Initiative and Edelman Long-Term Plan presentation is here and the underlying research on which the content guidance we provide to companies is found here.

There is a growing concern that the trading dynamics of our equity markets are too short-term focused, ultimately leading to corporate decision-making that satisfies near-term financial goals while sacrificing long-term value creation. Such short-term behavior seems to have a negative impact on performance and job creation. In engaging with us, CEOs and their teams have also expressed frustration at the earnings call as the dominant medium for communicating their narrative to the capital markets and have shown interest in increasing the proportion of long-term investors in their investor base.

As a result, public companies are seeking methods to convey their long-term strategy for value creation to investors in a coherent and efficient way. This is an imperative recognized not only by CECP and Edelman, but also by large institutional holders, the Business Roundtable, and the National Investor Relations Institute (NIRI), among others.

Below are strategies to enable companies to respond to this urgent long-term value imperative.

Develop a Long-Term Plan Framework

CECP’s Long-Term Plan Framework provides public companies with a set of nine themes through which they can communicate the critical elements of their long-term strategic plan and respond to the informational needs of institutional investors.

This Long-Term Plan Framework was developed based on research by the Strategic Investor Initiative at CECP in collaboration with Professor George Serafeim at Harvard Business School and KKS Advisors and draws on long-term plan presentations by over 25 CEOs at CEO Investor Forums, feedback from institutional investors and research by FCLTGlobal. Through a shared interest in this topic, Edelman and CECP have now published a guide on illustrative examples and emerging practices in disclosing long-term plans, leveraging CECP’s Long-Term Plan Framework and associated content guidance. We suggest that the themes of a long-term strategy can be infused throughout the Investor Relations calendar, including investor days and segments of the earnings call.

 

Cultivate Institutional Investors’ Trust

This year’s Edelman Trust Barometer Special Report: Institutional Investors indicates that providing long-term guidance has a significant impact on investor trust. Understanding a company’s long-term strategic plan for growth and value creation is paramount to building trust and long-term investment from institutional money managers. Based on the survey of over 600 institutional investors representing $9 trillion AUM, the results also indicate that investors regard companies as ill-prepared for activism. It is illuminating to see that the reason investors take this view is because they believe companies fail to make and disclose strategic plans under the elements of CECP’s Long-Term Plan Framework, including identifying new and emerging risks, elaborating a credible growth strategy, demonstrating effective board engagement and capitalizing on ESG risks and opportunities.

Convey a Focused Sense of Purpose

CEOs increasingly champion public statements of purpose to provide a guiding narrative for the company and a rallying cry for employees, rooted in the core value proposition of the business. An aligned purpose, credibly communicated, is a key element in talent recruitment and retention. The 2019 Edelman Trust Barometer shows that prospective employees seek employers with purpose, so their own work can have a more meaningful impact. Academic studies also indicate that firms with high purpose and clarity on purpose, which enables purpose to be operationalized, tend to out-perform peer firms.

Corporate purpose can also help light the way through corporate crisis and disruption, providing a guide for priorities and to mobilize support from both internal and external stakeholders. Our work draws on examples from GlaxoSmithKline and Unilever to highlight differentiated examples of how a credible corporate purpose can be communicated to investors.

Integrate ESG into the Discussion

Corporations are wrestling with how to communicate their key ESG risks and opportunities. It is helpful for corporations to talk about the frameworks, such as SASB, that they use to navigate sustainability issues and the process for reviewing these issues internally. We highlight an example from Nestle which set out a materiality matrix, explained that it was prepared by their risk group, was reviewed annually by the board and more frequently by the executive committee. The presentation also led to a discussion of initiatives that operationalized the key issues set out in the matrix. This reflects our guidance that businesses need to explain how they are navigating choices material to their business, presenting material ESG issues as integrated into key strategies, not as a silo or list of awards.

Engage the Board as a Strategic Partner

Corporations need to set out a governance narrative building on the types of disclosures set out in the proxy statement. Institutional investors have heightened expectations for the board’s role in strategy – as confirmed in the Edelman Institutional Investor Trust Barometer. We also see that corporate governance structures are currently contested, whether in relation to board composition, tenure, combined CEO/Chairman role or other key governance features. So, it is important for a company to explain its governance practices, in the context of its long-term strategy. We highlight PSEG that disclosed a comprehensive director skills matrix, indicating the alignment of composition with current and future strategic needs. Corporations have also told us that the process to develop a long-term plan, using CECP’s Long-Term Plan Framework, has provided a valuable opportunity for enhanced engagement with the board as a true strategic partner to the management team.

In closing, the need for companies to improve their long-term narrative when communicating with investors is clear. We hope that the framework discussed during our most recent webinar will prompt more companies to include long-term thinking in their investor content moving forward. As always, we are happy to partner with you to help think about the framework in light of your company’s mission and goals.

Brian Tomlinson is research director, Strategic Investor Initiative, CECP.

Lex Suvanto is global managing director, Financial Communications and Capital Markets, in New York.

Lauren Scott is senior vice president, Financial Communications and Capital Markets, in San Diego.

Julia Sahin is vice president, Financial Communications and Capital Markets, in New York.

 

 

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