To say that shareholders care most about today’s stock price movements has become a truism. And perhaps some truly do feel this way. It’s hard to emerge from a quarterly earnings call without the impression that at least analysts care a great deal about meeting upcoming targets.
Long-term institutional investors (also known as intrinsic investors), however, care more about the long-term drivers of value creation. Our research has shown that these investors have an outsize influence on a company’s stock price over time. The results of our latest survey of chief investment officers of leading global funds that make large, selective investments in equities reflect these points.1
The respondents make clear that their funds prioritize sustainable value creation over “short termism” and favor CEOs who move quickly and boldly to reallocate a company’s capital to enable value-creating growth. Asked to rank the three most important drivers of long-term value creation, respondents bear down on the basics: cost optimization, capital productivity, and product innovation (Exhibit 1).
Although there were some variations across industries, chief investment officers overwhelmingly ranked those three drivers the highest (Exhibit 2).
Investors also clearly identify sustainable competitive advantage, followed by return on capital criteria (earnings and capital allocation) and management record, as key factors in deciding whether to buy or hold a financially healthy company (Exhibit 3). Perhaps surprisingly, the respondents don’t rate outperforming peers on growth as quite so essential—presumably, that would change for underperforming those peers. Nor were broader industry trends necessarily determinative. These experienced investors understand that growth can be finicky, while fundamentals such as solid operations, a focus on competitive advantage, and effective management create value over the longer term.
The other side of the coin is that respondents want CEOs to focus much less on short-term earnings and much more on resource reallocation. That starts with faster overall restructuring—selling the assets that don’t align with the way that a company will create value over the long term (Exhibit 4).
More than 50 percent of chief investment officers surveyed also want management teams to think explicitly about the impact their strategy has on other stakeholders, such as employees and customers. This concern is entirely consistent with understanding what makes for a strong brand and a sustainable competitive advantage. Indeed, it’s telling that chief investment officers identified the very behaviors that mark a short-term approach as CEOs’ biggest mistakes.
All told, the survey results reinforce what intrinsic investors have been making clear for years: companies should not prioritize short-term financial performance at the expense of long-term value creation.