Prime Numbers: The investors you want disdain ‘short termism’

It’s easy to understand why managers focus on quarterly earnings and meeting short-term guidance. The short-term investors and their proxies, sell-side analysts, are the most vocal participants in earnings calls and most active in contacting companies for the insights upon which they trade.

However, long-term institutional investors (also known as intrinsic investors) care most about long-term value creation. In our recent survey of chief investment officers of leading global funds that make large, selective investments in equities, the respondents said they want management teams to prioritize the basics: cost optimization, capital productivity, and product innovation (Exhibit 1).

Surveyed investors tend to prioritize similar core principles, although there is some variation by industry.

The same investors told us that CEOs’ biggest downfalls are overfocusing on short-term guidance and failing to divest unproductive assets (Exhibit 2).

Intrinsic investors believe that overfocusing on short-term earnings and underperforming on long-term value creation are CEOs’ biggest mistakes.

For more details of our latest CIO survey, check our this recent article.

Jay Gelb is a partner in McKinsey’s New York office, where Vartika Gupta is a solution manager; Rob McCarthy is a senior knowledge expert in the Boston office; and Werner Rehm is a partner in the New Jersey office.

Connect with our Strategy & Corporate Finance Practice