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Two Key Areas of Governance Risk Examined in New Research
November 3, 2015 | The Conference BoardEstimated reading time: 4 minutes
The second report, Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?, examines the increasing pressures organizations face to prioritize immediate financial performance over long-term sustainability, and reviews proposed solutions—for recalibrating the balance. Moving beyond the heated rhetoric generated by headline stories, it offers a rigorous analysis of the four most impactful (and controversial) drivers of short-term behavior: activist hedge funds that agitate for immediate shareholder value above all else; executive compensation design that does not promote a “buy and hold” mentality; “quarterly capitalism” preoccupied with the next earnings report; and changes in capital markets in which trading has supplanted investment.
“Business investment has declined substantially in the last decade as compared with profits available for investment,” said Donna Dabney, executive director of The Conference Board Governance Center and a co-author of the report. “Instead, public companies have increasingly spent their cash on dividends and stock buybacks to the point that payouts to shareholders in the second quarter of 2015 exceeded free cash flow.”
“In coming years, growing labor shortages in mature countries are likely to cause corporate profitability to fall from the exceptional highs in the post–Great Recession,” said Gad Levanon, labor markets lead at The Conference Board and a co-author of the report. “This will increase pressure to demonstrate short-term performance even further in the near future.”
According to the authors, public corporations have been the engine of growth and prosperity since the beginning of the twentieth century, but future prosperity is being jeopardized by the short-term focus of many market participants on extracting value today instead of creating value for the future. The report lays out a number of steps public corporations, their investors, and policy makers can take to balance short- and long-term performance.
About The Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States.
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