Investors are increasingly seeking firms with long-term growth strategies, rather than ones focused on managing short-term earnings to boost the stock price. This, in turn, is triggering a shift in the perceived role of the CFO — from bean counters to planters of seed corn.
No one has done more to spotlight the contrast than Laurence Fink, the CEO of BlackRock. As head of the world’s largest asset manager, with $4.6 trillion in holdings, Fink in February sent a letter to the CEOs of all S&P 500 companies that essentially cut the Gordian knot of short-termism. Companies have been paying sharply higher dividends and buying back their shares much more aggressively, he says, in order to please people like him. Fink is essentially saying: Stop it! Invest more of that capital in growing the company. Do away with the game of quarterly earnings guidance, and instead articulate to investors your “strategic framework for long-term value creation.”
Backing this up is another group of asset managers who have committed $2 billion to invest in a newly created S&P Long-Term Value Index, a subset of companies doing things right. “We are trying to use the index to change corporate behavior,” said Mark Wiseman, chief executive of the Canada Pension Plan Investment Board, the lead investor in the initiative. Wiseman has helped start Focusing Capital on the Long Term, a new institute that also counts Barclays and Unilever as founding members.
Redefining the CFO role
For CEOs, creating and communicating long-term growth strategy is easier said than done. After all, it’s the CFO who typically sets expectations about growth to investors and then allocates resources to ensure their organizations deliver. CFOs know exactly the role that their company plays in their investors’ portfolios. So if the organization is going to invest in longer-term growth, this could increase the stock’s beta — both in downside risk and upside reward.
That’s why the CFO needs to take charge of telling that growth story to investors while clearly communicating the higher beta. Knowing how to frame and tell this story is critical for a CFO wishing to manage the natural tension between inspiring and scaring investors.
Some leadership teams have served as guiding examples of how to overturn short-termism and reorient their enterprise. In 2010, when Mark Bertolini, CEO of Aetna, began articulating a strategy to invest billions to transform from a health insurance company to a health care company, analysts grumbled. “If you don’t like our strategy,” he told them. “Then get out of our stock.” Many did. But the shareholders who left were replaced by ones who believed in the long-term strategy.