Building Long-Term Value in a Short-Term World

Building Long-Term Value in a Short-Term World
Alfred Rappaport

Essential Messages
Short-termism destroys
Incentives matter
There’s a better way
2

Financial Crisis of 2007-9
Public sector culprits
Congress
Federal Reserve
Government bailouts
3

Financial Crisis of 2007-9
Private sector culprits
Homebuyers
Appraisers
Lenders
Credit-rating agencies
Corporate boards
Investment banks
Institutional investors
4

Corporate Short-Termism
“Talks” shareholder value
“Walks” quarterly earnings
5

Pay-Performance Disconnects
Annual performance plans
Multi-year plans
Non-financial performance incentives
Standard stock option plans
Restricted stock grants
6

Superior Long-Term Performance Plans
Indexed option plans
Equity-premium option plans (EPOPs)
7

Essential Habits of Value-Creating Companies
Do not manage short-term earnings.
Select strategies that maximize long-term value even if they lower near-term earnings
Instill a consumer equity mindset throughout the organization.
Reward employees at all levels for delivering superior long-term value.
Return cash to shareholders when there are no value-creating investments.
Provide investors with value-relevant information.
8

Overhaul of Corporate Reporting
The objective
The shortfall
Corporate Performance Statement
9

Corporate Performance Statement
10

Investment Management Short-Termism
Relative performance measurement
Benchmark index
Similar funds
Tracking error
11

What Determines Investor Returns?
Fees and expenses
Manager incentives
Performance-chasing
Numbers to remember
60%, 70%, 80%
9%, 7.5%, 6%,
12

Long-Term Performance Fees
Base fee
Rewards and penalties
Performance measurement period
13

Performance Plan Benefits
Longer time horizons
Lower fees, higher returns
14

Tilting the Investment Odds
Concentrated funds
Expectations investing process
15

Essential Messages
Short-termism destroys.
Incentives matter.
There’s a better way.
16

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Building Long-Term Value in a Short-Term World

by McGraw-Hill Professional on Oct 11, 2011

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Building Long-Term Value in a Short-Term World — Presentation Transcript