There is growing concern that the way companies structure their executive compensation packages is leading U.S. corporations to focus too much on short-term results at the expense of future stability and global competitiveness.
``As things stand in corporate America, people are forgoing long-term value creation for short-term results,'' said Ira Millstein, senior associate dean for corporate governance at Yale University and a senior partner at New York law firm Weil, Gotshal & Manges LLP.
Millstein was among the speakers at the National Association of Corporate Directors meeting, held Oct. 14-16 in Washington.
``Short-termism impacts the way our corporations and our economy perform,'' Millstein said. ``It is imbedded in our systems and will need a lot of people doing a lot of things for it to change.''
At the root of the problem are financial measures used to determine executive compensation, according to Bill Donaldson, who was chairman of the Securities and Exchange Commission from 2003-05.
``There are several causes for the short-term orientation, but the major contributor is that executive pay is tied to financial measures - most of them short term - which forces executives to focus on short-term results,'' said Donaldson, chairman and chief executive officer of Donaldson Enterprises Inc., a private investment firm he founded in 1981.
In addition, the average tenure of a CEO has dropped from 8.9 years to 4.9 years in the past 10 years, he said at the Washington meeting.
``Everyone has short-term agendas and reaches them any way they can,'' he said. That leads to deferred maintenance, deferred long-term investment, less research and development, a propensity toward layoffs and other measures that sacrifice long-term competitiveness, he said.
Judith Samuelson, executive director of Washington-based Aspen Institute's Business and Society program, works with business leaders to create a sustainable global society.
``People are concerned with short-term approaches for different reasons, but short-term pressures are holding [corporations] back from regaining public trust,'' Samuelson said.
``We have to have business at the table to tackle inequities in pay as well as issues such as climate change, sustainability and energy policy. Business goals need to be aligned with the long-term needs of society.''
To date, she said, 21 corporations, including Xerox Corp., PepsiCo Inc. and Pfizer Inc., have agreed to the long-term value-creation guidelines for corporations and investors developed by her program at Aspen.
But the problem isn't just with corporations, according to Anne Simpson, executive director of the International Corporate Governance Fund in London. Many investors also suffer from a short-term approach, she said.
``Pension funds and mutual funds are part of the problem because they redirect their investments quickly to maximize their returns. They say they are long-term investors, but they put their dollars into short-term vehicles,'' Simpson said.
``More of the capital market must be directed to the long-term side if we are to prosper,'' she said. ``We need to get the largest shareholder groups on board to using this approach or the effort will be futile.''
Damon Silvers, associate general counsel of the AFL-CIO, agreed.
``Long-term investors are too often presented with a choice of holding management accountable to sticking to a long-term strategy or capitulating to short-term pressures,'' he said. ``Instead of relaxing short-term pressure on boards and CEOs and stressing long-term goals, we have done the opposite.''
As a result, Silvers said, ``people with short-term objectives are running our companies.'' And all too often, these CEOs ``demand that their workers and management team act in a short-term way and believe they can exit before the public and the markets realize that they are cutting out the core of a company,'' he said.
``It is not in the best interest of corporate America for this to go on,'' Silvers said. ``We have to insist our business leaders achieve long-term interests and are accountable for long-term results.''
Former SEC Chairman Donaldson said it is incumbent on boards of directors to get the ball rolling on shifting priorities of CEOs through a new approach to executive compensation.
``In the best interests of shareholders, boards have the opportunity to demand that management focus on long-term results, not quarterly results,'' he said.
``They have the responsibility to make sure the company is focused on long-term strategic plans and that compensation is tied to those long-term strategic plans. If we are really talking about trying to change the system, the boards are the most robust place to change it because they have the opportunity to keep management's feet to the fire,'' Donaldson said.
Yale's Millstein concurred. ``If you are going to make any change, boards have to be the ones to lead management in the direction of long-term results.''
But that won't be easy, according to Silvers.
Executives are extremely well-paid for hitting short-term targets, so they will be very reluctant to have their pay structures altered to have pay structured around a corporation's long-term performance, especially if it is based on a time period after they are gone, Silvers said.
Regardless, it is time to stop passing the blame, said Samuelson of the Aspen Institute.
``Business says that it is the investor's fault and vice-versa,'' she said. ``It is a matter of developing metrics that look out years ahead and making sure you create incentives for executives tied to those metrics. You need to communicate the long-term message so it is heard over the loud voice of short-term investors.''