New York, USA, 29 March 2012 – Inaccurate measurement of investment
values, returns, risks and liabilities can create substantial
distortions to long-term investment strategies and drive long-term
investors to adopt a short-term orientation, according to the
Measurement, Governance and Long-term Investing report, released today
by the World Economic Forum.
Since long-term capital can play an important role in helping to drive
economic growth, stabilize financial markets, and provide financial
returns to fund pensions, education and other social goods, the report
focuses on the often overlooked, yet increasing number of
measurement-related challenges that can hinder long-term investing.
Among such challenges:
Mark-to-market rules require long-term illiquid portfolios to be
evaluated relative to a public market benchmark, however, short-term
variations in the value of assets held for the long term can lead to
shifts in investment policy or execution that hinder success in
long-term investing.
Poor risk measurements or an inadequate understanding of risk can lead
institutions to hold riskier (or less risky) assets than they should
otherwise.
Staff evaluation and compensation schemes may create a framework that
rewards staff for acting against the stated long-term interests of the
institution.
The report argues that without effective governance, measurement
schemes can distort decisions regarding the choice of investments and
the time frame over which they are held. And the lack of meaningful,
intuitive measurements for performance and risk over long-time
horizons adds more complexity to long-term investing and the
governance of such efforts.
“Long-term patient capital is vital to promote sustainable growth,
create jobs and solve problems plaguing the global economy today. Yet,
as this important paper highlights, a short-term orientation in terms
of performance measurement, leadership, media focus and regulatory
constraints threatens to obstruct long-term investment and deprive
society of the critical benefits it can provide,” stated Scott Kalb,
Chief Investment Officer, Korea Investment Corporation (KIC), and
Chair of the World Economic Forum’s Global Agenda Council on Long-term
Investing.
The central conclusion and recommendation of this study is that
governing bodies and other external stakeholders need to act on the
understanding that the performance of long-term investments unfolds
over time periods longer than the quarter or the year, even when
short-term measurements are used. Such metrics should be placed in
context, lest long-term strategies be abruptly and unfortunately
revised.
“In this report, we consider the impact of different types of
measurements and how, combined with thoughtful governance approaches,
institutions can think more carefully about measuring and supporting
their long-term strategies,” observed Josh Lerner, Jacob H. Schiff
Professor of Investment Banking, Harvard Business School, and the lead
researcher for the report.
“Having a long horizon accentuates the importance of governance
models, and long-term investors can play a critical role in fostering
leading governance practices, both within their own institutions and
for the companies that they invest in,” remarked Mark Wiseman,
Executive Vice-President, Investments, Canada Pension Plan Investment
Board. “For long-term investors, good governance that includes a
qualified board with a solid long-term orientation and commitment is
integral to ensuring that they are able to stay the course through
economic and investment cycles. This report makes the case that
without appropriate board oversight on risk assessment, valuation
metrics or compensation structures, investors can easily lose sight of
long-term gains and focus instead on short-term metrics.”
“Although there are numerous metrics for the short-term assessment of
long-term investments, none are without limitations. Good governance
therefore is critical to ensure sound decision-making around which
investments are chosen and for how long they are held,” said Michael
Drexler, Senior Director, Head of Investors Industries, World Economic
Forum USA.
The report was developed by the World Economic Forum in collaboration
with a research team led by Josh Lerner of Harvard Business School.
Guidance was provided by the World Economic Forum’s Global Agenda
Council on Long-term Investing.