When the Investor Pool Shifts, ‘Follow the Money’
While stock exchanges continue to be driven by short-term influences such as daily stock movements, quarterly reporting cycles, the average holding period for a security in an index fund is about 28 years. This is because of the under-acknowledged role of long-term institutional investors.
In their new book Talent, Strategy, Risk: How Investors and Boards Are Redefining Total Shareholder Return, Bill McNabb and Ram Charan say that companies must shift the focus of their attention from total shareholder return to talent, strategy and risk.
MCNABB/CHARAN: The data clearly indicates that there’s been not just a subtle, but a massive shift to the longer-term holders, the big index players, the passive players, if you like.
Almost simultaneously with that shift to long-term holders is a continuing rise and aggressiveness among what we would have to consider to be investors who are more short-term focused. So you’ve got the long-termers on one side, looking at long-term value creation, and then you have others, typically small holders, maybe even 2% or 3% of the company, that have shorter-term objectives.
Awakening Sleeping Giants
The short-termers have ironically awakened the sleeping giants. So more than ever, you’re seeing the long-term holders begin to weigh in, sometimes in concert, on issues that just make fundamental good sense for the management of an enterprise, the composition of the board, for the strategic alignment of the activities of a company, and obviously the whole question of risk which has forced some companies to go, unfortunately, out of business.
BRINK: Hasn’t talent, strategy and risk always been at the forefront of most businesses? What’s new about this?
MCNABB/CHARAN: Well, we would argue that all three of these things are being redefined. Most boards, even 10 years ago, talked about strategy ad nauseam, and very little attention was given to talent other than, from time to time, weighing in on CEO selection.
The diversity issue has risen its head clearly in the boardroom around this issue of do you have the right set of questions being asked by the board? Is the right information coming in via a diverse perspective of views and experiences in the boardroom? So it’s not that TSR historically was totally ignored. It’s that now, it is foundational and centerpiece to what boards must do to create long-term shareholder value.
The Importance of a Diversity Mindset
The key point of diversity is not just the gender or race. It is also the mindset, the way people think, their risk profiles. That brings different viewpoints. And the reason for this is that the complexity of business is increasing every day. We must pay attention to stakeholders, we must address China-America tension, we should address the new industrial policy that the White House is advocating, etc. So diversity is a very helpful thing.
And in the race for diversity, we’re often looking for raw talent. What is the raw talent in a human being — not what their pedigree is, not what their title is.
The right talent, the strategic comparatives and risk profile can address many of the concerns that investors have about the impact of a corporate activity on the environment, the social good and governance.
And if your customers are diverse, which, if you look around in any society that I’ve been in in the U.S., they are diverse, it’s hard to imagine being able to connect with a customer if you haven’t lived in their shoes. So having that sensitivity — that openness, to the way in which different segments of the population react to and think about products — is essential, or you will be lost in the boardroom.
BRINK: You said that the key is raw talent, but if someone is lacking formal qualifications, how do you select that person based on raw talent?
MCNABB/CHARAN: I learned this from these people who didn’t have any degrees who are often very good at spotting talent. The way they do that is that they observe what someone does well and what we call, their God’s gift. If they’re not working with someone but interviewing them, then you invest time to get them to describe what they have done, how well they did, and out of the three or four incidents, you can identify their natural strengths.
This begins to show what I call observable and verifiable parts, because we’re looking more for what they do well; we’re not looking so much for what they do wrong. And then we verify that by the references. In the references we ask the people, “Don’t tell us the negative. Tell us what they really do. What’s their raw talent?”
The Investor Pool Is Shifting to a Younger Generation
BRINK: What about ESG and the double bottom line? There’s obviously been a lot of conversations around this on BRINK. where would you place that in terms of the importance for a company?
MCNABB/CHARAN: We define ESG with two Es: employee, first; environment; society and governance, and it is wrapped up in all of those things. With the right talent, with the right strategic comparatives and the right risk profile, you can address many of the concerns that investors rightfully have about the impact of a corporate activity on the environment, on the social good and, of course, governance.
The most important part we now know is that you can earn a good return on ESG investment. The technologies are now here. So it’s important to do benchmarking of the companies that are doing it.
In some cases, you cannot do ESG alone — look at New Orleans, look at Houston, there are large complexes of chemical companies. The whole area is heat and carbon. You have to form a coalition, a consortium, including local authorities, and take the leadership to deal with it. This way, you’re going to make a difference because, if you delay it, the cost will be much higher in the future and then the capital markets will punish you.
The investor pool is shifting to a younger set, to people in society who want to be investing in things that support, rather than destroy, the environment. They want to invest in things that are good for society. So, by necessity, follow the money; if you really want investors in your stock, you need to be sensitive and mindful to the realities of the shift in investor sentiment and investor behavior.