- Want to be more like Amazon? Think long-term, says Alison Loat, managing director of FCLT Global, a non-profit that researches and advocates for long-term investors.
- Amazon’s board of directors has a statement of purpose that explicitly states that their job is to look out for long-term shareholders. Just creating a statement of purpose can make a difference in the right direction, Loat said last month at the Milken Institute Global Conference.
- But this is just one strategy public companies can use to keep long-term value front of mind, she said.
- Executive compensation, quarterly guidance and long-term roadmaps can all impact how a company performs over the long haul.
- Read more on the Business Insider homepage.
Alison Loat is on a mission to end quarterly guidance, and BlackRock, McKinsey, and Dow are all on her side.
Loat is the managing director at FCLT Global, whose name stands for Focusing Capital on the Long Term. It’s a Canadian non-profit founded by teams at McKinsey, the Canadian Pension Plan Investment Board, Dow, BlackRock and India’s Tata. The firm thinks about investments over a 75-year period.
Loat said that telling investors and analysts what to expect from quarter to quarter puts too much emphasis on what happens at a company in the short-term.
What executives should be thinking about is what will happen over years, Loat told Business Insider from the Milken Institute Global Conference in Beverly Hills last month.
“There’s the narrative that’s set up where if you want to be long-term, you have to stay private for longer,” Loat said. “But there’s lots of stuff you could do on the public markets to be long-term as well.”
Thinking long-term is the name of the game for Loat. FCLT Global’s name stands for Focusing Capital on the Long Term. It’s a Canadian non-profit founded by teams at McKinsey, the Canadian Pension Plan Investment Board, Dow, BlackRock and India’s Tata. The firm thinks about investments over a 75-year period.
“We think about the baby born today and their retirement,” she said.
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FCLT does advocacy and research around one question: What changes can public companies implement to make them better investments for long-term shareholders?
“We’re trying to create a movement or momentum around this, bringing together people who make very material investment decisions everyday by the nature of their jobs,” said Loat.
To be like Amazon, write a statement of purpose
To get there, FCLT has some best practices it recommends to all public companies.
One is giving the board of directors a clear statement of purpose.
Amazon is an all-star in this arena since the $914 billion company’s board of directors has a mission statement which explicitly says its purpose is to “build long-term share owner value.”
“It’s a symbol but it’s important because of their way of orienting everyone and bringing them together over a shared objective,” Loat said.
Another tip: Don’t give guidance. Companies are legally required to give quarterly financial updates, but quarterly guidance takes it a step further.
When a company gives guidance, it tells investors what to expect in an upcoming quarter that hasn’t closed yet. Apple, Cisco, and Twitter all issued quarterly guidance in their latest earnings, for example.
“It’s not a good practice, and it orients everybody around ‘what am I going to do in three months? Not, ‘what am I going to do in three to five years’,” she said, adding that this leads to volatility which only benefits short-term traders.
Instead of quarter-to-quarter guidance, FCLT recommends that companies create a long-term roadmap which includes their three-to-five year plan, the key performance indicators for that period, and an outline of how the company plans to allocate capital to meet its goals.
To quench investors’ and analysts’ desire for metrics, companies can give a quarterly update on that long-term roadmap, Loat said.
And if all else fails — hit company leadership where it hurts. Executive compensation is another tool that can be used to keep companies on track for the long-term.
Loat suggested companies lock up share compensation for five to 10 years — likely longer than the duration of the executive’s term — so that leaders are motivated to think about the company’s performance long after they have left.
“The upshot is, companies that act in a long-term way out perform others on basically any metric that matters, including job creation and contribution to GDP,” Loat said.
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