Back to long-term capitalism
A long-term investor weighs in
Roger Ferguson President & CEO, TIAA-CREF
I wholeheartedly agree with the basic premise of Dominic’s article about the need to reform capitalism and with his prescriptions for getting there. TIAA-CREF has argued for years that businesses should take a long-term view. Recently, for example, we released the sixth edition of our policy statement on corporate governance—the first was published in 1997—which advocates some of the very things Dominic espouses, such as aligning executive-compensation policies with performance.
So I take issue with Dominic’s broad-brush statement that “pension funds, insurance companies, mutual funds, and sovereign-wealth funds” encourage companies to take a short-term view. It is neither inevitable nor axiomatic that all institutional investors promote or even tolerate “short-termism.” While it is true that some investors have not moved beyond a short-term perspective, many others are adopting strategies designed to protect the value of their investments over the long term. TIAA-CREF, for example, is a signatory to the UN’s Principles for Responsible Investment, a global association of over 800 asset managers, pension funds, and other institutional investors and service providers. Its members believe that good corporate governance and responsible business practices can enhance the long-term economic value of companies. Membership represents $22 trillion of assets under management.
At TIAA-CREF we aim to promote a long-term perspective because it is in the best interests of the people we serve. As a pension provider, we must balance a long-term view with our participants’ current needs. We have retirees who depend on us now for the income they live on, but today’s 25-year-old participant may well be relying on us four or five decades from now to translate those investments into a steady stream of lifetime income. By virtue of our mission, we’re in it for the long haul.
Moreover, we invest in more than 8,000 companies worldwide, including most of the broad US stock market and most large-cap stocks in the rest of the developed world. As “universal owners,” we are part of the constituency whose interests are most tightly aligned with stable and growing markets over time. As providers of capital, long-term investors are among those with the most to lose if markets deteriorate and asset prices fall.
For this reason, Dominic is right to argue for aligning capital’s interest more closely with capitalism’s. That’s why it’s critical—as Dominic points out—that institutional investors participate as active owners of their portfolio companies, using their influence and leverage to promote good corporate governance and effectively functioning markets.
Having billions of dollars invested in the world’s stock markets gives us a place at the table with corporations globally. We consider it part of our fiduciary responsibility to vote our proxies thoughtfully and to talk with companies to ensure, for example, that executive-compensation practices provide the right kinds of incentives for managers to create long-term value. Equally, we may raise a concern if we believe a company is not adequately managing the risk that an industrial accident could damage its value and harm the entire economy. Good governance and social responsibility may contribute to better financial performance and expose companies to lower risk, which in turn contributes to the strength of the return we seek for our participants and to the strength and stability of the markets.
In short, many institutional investors are already committed to the path of long-term results. Moreover, we would argue that to achieve the reforms we and Dominic support, the onus is on companies to ally themselves more closely with investors who take a long-term approach. By working hand in hand with long-term institutions, businesses could make real progress in achieving just what Dominic urges: the renewal of capitalism.