Building Long-Term Value in a Short-Term World

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A presentation by Alfred Rappaport based on his new title Saving Capitalism from Short-Termism.

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Building Long-Term Value in a Short-Term World

  1. 1. Building Long-Term Value in a Short-Term World<br />Alfred Rappaport<br />
  2. 2. Essential Messages<br />Short-termism destroys<br />Incentives matter<br />There’s a better way<br />2<br />
  3. 3. Financial Crisis of 2007-9<br />Public sector culprits<br />Congress<br />Federal Reserve<br />Government bailouts<br />3<br />
  4. 4. Financial Crisis of 2007-9<br />Private sector culprits<br />Homebuyers<br />Appraisers<br />Lenders<br />Credit-rating agencies<br />Corporate boards<br />Investment banks<br />Institutional investors<br />4<br />
  5. 5. Corporate Short-Termism<br />“Talks” shareholder value<br />“Walks” quarterly earnings<br />5<br />
  6. 6. Pay-Performance Disconnects<br />Annual performance plans<br />Multi-year plans<br />Non-financial performance incentives<br />Standard stock option plans<br />Restricted stock grants<br />6<br />
  7. 7. Superior Long-Term Performance Plans<br />Indexed option plans<br />Equity-premium option plans (EPOPs)<br />7<br />
  8. 8. Essential Habits of Value-Creating Companies<br />Do not manage short-term earnings.<br />Select strategies that maximize long-term value even if they lower near-term earnings<br />Instill a consumer equity mindset throughout the organization.<br />Reward employees at all levels for delivering superior long-term value.<br />Return cash to shareholders when there are no value-creating investments.<br />Provide investors with value-relevant information.<br />8<br />
  9. 9. Overhaul of Corporate Reporting<br />The objective<br />The shortfall<br />Corporate Performance Statement<br />9<br />
  10. 10. Corporate Performance Statement<br />10<br />
  11. 11. Investment Management Short-Termism<br />Relative performance measurement<br />Benchmark index<br />Similar funds<br />Tracking error<br />11<br />
  12. 12. What Determines Investor Returns?<br />Fees and expenses<br />Manager incentives<br />Performance-chasing<br />Numbers to remember<br />60%, 70%, 80%<br />9%, 7.5%, 6%, <br />12<br />
  13. 13. Long-Term Performance Fees<br />Base fee<br />Rewards and penalties<br />Performance measurement period<br />13<br />
  14. 14. Performance Plan Benefits<br />Longer time horizons<br />Lower fees, higher returns<br />14<br />
  15. 15. Tilting the Investment Odds<br />Concentrated funds<br />Expectations investing process<br />15<br />
  16. 16. Essential Messages<br />Short-termism destroys.<br />Incentives matter.<br />There’s a better way.<br />16<br />
  17. 17. Read a sample chapter<br />Available now<br />

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