What is best for shareholders? To focus on longer term returns, which may mean foregoing short term results, or to constantly strive for short term improvements? The fact that many shareholders are not in for the long term makes the picture more complex. This was recently recognised by Don Argus during an address he gave to the Australian Institute of Company Directors. He noted that companies needed to recognise this constituency, represented at the extreme by the ‘day-traders’ who may be in and out of a stock within a matter of hours, and find a way to communicate effectively with them about expectations. Mr. Argus also highlighted the directors’ need to balance this with the long term health and sustainability of the business.
But recognising that there are short term investors does not help in developing the effective business and executive pay strategies needed to best realise shareholder value. Most companies still adopt a rolling three to five year strategy. Hence, there is a predisposition to longer term shareholder returns. This still does not mean a bias should be present to manage and pay for long term results. For example, all else being equal, a company may be concerned that it is trading at a discounted P/E ratio compared to its industry peers. It will probably discover its beta is higher, and that this is correlated with earnings volatility. So, once the business strategy is confirmed, the company may serve its shareholders best by smoothing out its earnings volatility, reduce its beta, and have the market recognise and reward its shareholders by adjusting with a risk premium and hence improving its P/E ratio. One of the tools to get there could be a greatly enhanced STI opportunity for operations executives and the CEO to focus on constant improvement in short term results.
Unfortunately, the situation is not so simple for many companies relying on a mix of short, medium and longer term strategies for optimal shareholder returns.© Guerdon Associates 2023 Back to all articles