From yesterday’s Financial Post, we learn that Al Gore and former Goldman Sachs Asset Management CEO, David Blood, have teamed up to take on “short-termism” in the financial industry. Good luck!
Former U.S. Vice President Al Gore wants to end the default practice of quarterly earnings guidance and explore issuing loyalty-driven securities as part of an overhaul of capitalism which he says has turned many of the world’s largest economies into hotbeds of irresponsible short-term investment.
… five key actions which he hoped would revive the discussion on how to clean up capitalism and put companies, investors and stakeholders on the path towards long-term, sustainable profit.
These include ending quarterly earnings guidance from companies, which the authors said incentivized executives and investors to base decisions on short-term factors at the expense of longer-term objectives.
Here’s an interesting tidbit for you (emphasis added):
… “Today the average mutual fund in the U.S. turns over its entire portfolio every 7 months; 20 years ago it was every 7 years. Something has fundamentally changed and the problem with that is it means we’re not making good investing decisions… and not delivering proper and efficient wealth creation.”
Obviously I am all for a “path towards long-term sustainable profit” but I am not convinced that quarterly earnings guidance is the issue. The bigger problem as I see (discussed in the article) has to do with compensation. Specifically, compensation plans that either explicitly (or implicitly, since in retrospect we see the same effect thanks to supplementary grants and other shenanigans) guarantee lottery-like wins on the upside and little to no exposure to the downside. And all of this is really just a symptom of greater corporate governance concerns, like weak or dysfunctional boards, which should be Gore’s real focus. Read more about executive compensation here.
Read the full article here. What do you think? Is Gore on the right track?
Author Disclosure: None
Talk to Frank about Al Gore’s plan
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