One of the key ways that institutional investors can promote a long-term orientation in the companies they invest, is by rejecting a company’s compensation plan if it puts too much emphasis on short-term results, says Bob Pozen, visiting senior lecturer at the MIT Sloan School of Management.
Writing in the Financial Analysts Journal, he says if institutional investors want companies to take a long-term approach to corporate growth, they should push for three-year performance period for determining cash bonuses.
He says long before any proxy vote fight is in the offering, institutional investors should push for their vision of sustainable long-term growth through engagement with the companies they own. And one of the most important ways to facilitate changing corporate behaviour to be more long-term in orientation is to shift companies away from basing their cash bonuses on only the prior year’s performance.
Another way is for investors to engage in the process of nominating directors with a long-term approach to corporate growth.
“Big owners should act like big owners,” he says. “In that role, institutions should carefully study any proposal’s impact on a company over many years, depending on the type of company and its history of delivering long-term results.”
In the article, Pozen who is the former chairman of MFS Investment Management and is also a senior lecturer at the Harvard Business School as well as a senior fellow at the Brookings Institution, looks at the role of institutional investors in curbing corporate short-termism. He argues that institutional investors are not active in taking an outspoken position for or against activist hedge funds.
“If institutional investors are serious about supporting long-term value creation, they can pursue this goal through various forms of investor engagement with the company. Then, if a hedge fund launches a proxy fight, they should vigorously participate to make sure the outcome promotes corporate growth over the next several years rather than the next few months.”
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