Companies that put employees first perform better

This article is brought to you thanks to the strategic cooperation of The European Sting with the World Economic Forum. Author: Brian Tomlinson, Research Director, Strategic Investor Initiative, CECP & Alison Omens, Managing director, programs and strategic engagement, Just Capital

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One clear takeaway from the last decade – following the 2008 financial crisis – is this: when corporate behaviour prioritizes short-term shareholder interests, we have a problem. It leads to perverse incentives and a focus on the wrong things in the C-Suite.

A broader consensus is forming to suggest that short-termism is a problem and has negative consequences for corporate performance and sustainable economic growth. The world’s largest asset managers are asking for companies to “share strategic frameworks for sustainable value creation” and have indicated the imperative of hearing the “long-term view” from CEOs. Jamie Dimon and Warren Buffett recently called quarterly earnings guidance outmoded, and the Common Sense Corporate Governance Principles 2.0 see “long-term performance” as the key objective of corporations. It seems that that the Milton Friedman model is now seen as unsustainable.

Not inconsequentially, Americans agree. According to JUST Capital’s comprehensive survey work – polling more than 81,000 people over the last four years – Americans care most about how companies treat their workforce, whether they respect and value their customers, if they create quality, beneficial products, and how they relate to their communities and treat the environment. Americans want to see CEOs running their businesses in a way that meets the needs of all their stakeholders – and not just those whose needs can be met in the short term.

All this focus on short-termism is not an accident. It speaks to fundamentally linked problems in the way our corporations are managed, assessed, and valued. By primarily judging a company’s health on its quarterly earnings, markets heavily discount key drivers of sustainable value, such as corporate governance, human capital management, and research and development. Further, this kind of thinking can lead CEOs to forgo value-creating investments, fearing impatience in the public markets. Fundamentally, short-termism appears to unmoor a corporation from its stakeholders and the communities in which it creates (and has the potential to destroy) economic and social value.

We believe that capital markets and companies themselves must do a better job of pursuing long-term value creation and investing in the people that it affects. To do that, capital markets must have a better view of both what is currently happening and what is planned inside companies for the future.

Happily, disclosure is not a zero-sum game: more holistic, long-term information does not have to be at the expense of existing short-term data (such as those delivered through an earnings call). The key is to rebalance the mix of information disclosed, rather than report less frequently.

Increasingly in speaker forums, company disclosures and the media, we’re seeing a number of CEOs articulate and detail their plans to run more stakeholder-oriented, long-term-focused companies. Through the Strategic Investor Initiative at CECP, the CEOs of over 20 large cap corporations have so far delivered long-term strategic plans, directly responding to the expectations of structurally long-term investors and guidance from leading research organizations.

This type of disclosure provides a platform for CEOs to signal long-term intent and discuss topics, such as human capital management, which barely feature in mandatory disclosures. In working to expand disclosure on issues such as employee retention, diversity and workforce training, corporations can help reorient our markets toward the long term and direct capital toward companies that are thinking about the health and value of their workers, products and communities.

There’s more and more research underway showing that this future planning and stakeholder-value approach makes business and investment sense, too. Companies that perform best on integrated business performance indicators are also outperforming their peers in the market. Based on our research, our top 100 companies see an 8% higher return on equity, on average.

Early evidence in a study sponsored by the Strategic Investor Initiative has recently shown that capital markets do value the disclosure of long-term information around key topics such as human capital, purpose and corporate governance, and use it to inform investment decisions, engagement and voting behavior. This work provides additional motivation for CEOs to present a long-term strategic plan to investors.

By managing for the long-term needs of stakeholders, corporations can take back the narrative from short-term markets and the narrow confines of corporate value. This can help reorient our public markets and show that this kind of approach aligns with the values that the American public expects of American companies.