How Short-Termism Hurts Governance | Chief Investment Officer

Institutional investors believe corporate governance is a critical driver of performance, but struggle to focus on the long term, Aberdeen Asset Management has argued.

Corporate governance plays an essential role in investment decisions—but achieving good governance requires less focus on short-term performance, according to Aberdeen Asset Management.

The firm’s new survey found that 89% of institutional investors, trustees, managers, and consultants considered effective governance to be a critical driver of investment performance. As a result, 85% said asset managers should engage with invested companies both before commitments are made and at regular intervals afterward.

The respondents also rated poor governance as one of the biggest challenges companies faced, second only to tax regulations.

“A company is much more likely to talk to you if they don’t think you’ll sell their bonds or shares at the sight of one set of poor quarterly figures.”

“The research makes clear that governance has to be a fundamental part of what investors do day-in, day-out,” said Paul Lee, Aberdeen’s head of corporate governance. “It’s all about asset managers understanding what they own and not being shy of having conversations with the companies they invest in.”

Good governance, Lee continued, is most compatible with a long-term investment approach.

“A company is much more likely to talk to you if they don’t think you’ll sell their bonds or shares at the sight of one set of poor quarterly figures,” he said.

However, over two-thirds of survey respondents said their ability to focus on the long term is hurt by a fixation on short-term performance. Nearly half believed regulations also forced short-term thinking and acting. Investors also found a proliferation of models and metrics as a factor promoted short-termism.

“We need to do more as an industry to invest for the long term ourselves and encourage the companies we own to do the same,” Lee said.

Some 57% of respondents also identified governance regimes as a better way to evaluate risk and opportunity than whether the companies were in traditional emerging or developed markets.

Michael McCauley, a senior officer at the Florida State Board of Administration, said governance has been shown empirically to be a “risk mitigant.”

“Governance is a very significant and material factor within investment analysis,” McCauley said. “I always like to think of it as something that is on par with a lot of other fundamental factors that can drive performance and value.”