How Long-Term Investors Influence Corporate Behavior

In his recent letter to CEOs, Larry Fink, CEO and chairman of the mutual fund giant BlackRock Inc., based in New York City, repeated his call for organizations to share their strategies for creating sustainable value. He also added a new admonition to contribute to society or risk losing his company’s support.

This norm-shifting language regarding the corporation’s purpose, which is moving away from the profit-maximization (at any cost) model, reflects a growing dissatisfaction among long-term investors with (1) the impact of short-term-focused equity markets on returns and society; and (2) the current system of corporate-shareholder communications, i.e., the quarterly earnings call, which underrepresents the long-term perspective. A coalition of investors led by William McNabb III, board chairman of The Vanguard Group Inc., has responded with a letter to CEOs encouraging them to operationalize this broad call to action from investors to share long-term thinking.

More and more large public companies are responding to the increasingly vocal demands of long-term investors for information about their company’s long-term plans (meaning at least five years). In the last year and a half, 19 companies, representing well in excess of $1 trillion market cap, have delivered investor-facing long-term plans to audiences of key long-term investors. At one recent forum for CEOs and inventors, CEOs from Unilever, UPS, Johnson & Johnson, Merck, and Medtronic presented their company’s long-term plans.

These efforts are just a start toward reorienting capital markets so that corporations and investors can hold meaningful conversations about long-term value creation. We need a new venue and a new long-term-focused accountability environment for both communicating long-term plans and rebalancing disclosures within the existing call framework so that they include more content about the long term. With respect to the latter, the health care company Becton, Dickinson and Co. (BD), based in Franklin Lakes, New Jersey, has taken significant strides. In its most recent earnings call, BD provided extended commentary on its long-term strategy and other sustainability disclosures, working to change the complexion of this closely scripted event.

Corporations use various investor relations, disclosure, and engagement strategies to communicate with their investors. Yet the existing system of corporate communications with shareholders does not meet the informational needs of long-term investors. So how should managers adjust it? An investor-facing long-term plan provides part of the answer to this question.