Short termism in business: are investors to blame?
The UK, and many other countries, have struggled for a long-time with a perceived lack of investment by businesses resulting in a stagnant productivity and potentially limiting demand growth. Often investors, searching for returns in a world of low interests rates, are blamed for putting pressure on companies to underinvest. Three things we saw recently have cast an interesting light on this ongoing debate.
First, a study by the Bank of England on business investment and financing decisions found that “80% of publicly listed businesses that underinvested answered yes when asked if financial market pressures for short‑term returns were an obstacle to investment.” Admittedly this was only one of the factors which the Bank identified, but 80% struck us as a big number.
Seeming to support this argument, research from Mckinsey found that companies who invest for the long-term outperform their rivals. Between 2001 and 2014 the study found that companies focused on the long-term had average revenue and earnings growth 47% and 36% higher respectively than peers whilst increasing their market capitalisation faster and adding nearly 12,000 more jobs on average than their peers from 2001 to 2015. The authors state “61% of executives and directors say that they would cut discretionary spending to avoid risking an earnings miss, and a further 47% would delay starting a new project in such a situation, even if doing so led to a potential sacrifice in value.”
So, it’s the investors fault, right? Well not necessarily – and to be fair to McKinsey they don’t make such a simplistic claim either.
This brings us to the third thing we spotted. A recent Bank of America Merrill Lynch Global Fund Manager Survey found that 58% of investors want companies to increase capex spending compared to 19% who want increased cash returns and the pro-investment majority seems to be growing strongly.
Indeed looking at the historic data the survey has found that a higher number of fund managers have supported investment over immediate returns to shareholders since at least the middle of 2012. So, it seems clearly wrong to say that investors are against investment.
Coming to a simplistic conclusion is difficult, but our experience suggests a substantial part of this disconnect might be due in part to a disconnect between companies and investors and a confusion between the signal they are sending and the noise from short term market (share price) movements. Whilst this is hardly a new observation, it is clear that in these increasingly volatile times companies must ensure they are communicating clearly and regularly with investors over their strategy and approach to sustaining their business over the long-term.