* System blighted by short-termism
* Calls for end to quarterly company reporting
* Eyes loyalty-driven shares to counter short-termism
By Sinead Cruise
LONDON, Feb 16 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
Together with David Blood, senior partner of 'green' fund
firm Generation Investment Management, the environmental
activist has crafted a blueprint for "sustainable capitalism" he
wants the financial industry to adopt to support lasting
"While we believe that capitalism is fundamentally superior
to any other system for organising economic activity, it is also
clear that some of the ways in which it is now practised do not
incorporate sufficient regard for its impact on people, society
and the planet," Gore said.
At a briefing ahead of Thursday's launch, David Blood said
capitalism has been blighted with short-termism and an obsession
with instant investment results, which had ramped up market
volatility, widened the gap between rich and poor and deflected
attention from the deepening climate crisis.
The former CEO of Goldman Sachs Asset Management put forward
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 incentivised executives and
investors to base decisions on short-term factors at the expense
of longer-term objectives.
Companies have also been encouraged to integrate financial
reporting with insight on environmental, social and governance
policy so investors can clearly see how performance in the
latter can contribute to the former.
"This is a direct appeal, dare I say, attack on
short-termism in business," Blood said.
"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."
After hitting mainstream consciousness in the early part of
the last decade, the 2008 financial crisis brought efforts to
make global business more environmentally and economically sound
to a virtual halt.
But with so many roots to that crisis found in skewed asset
valuations and irrational short-term trading, the authors want
to restate the case for change while the pain of the credit
crunch was still fresh in the memory.
"We went down this path because we fundamentally believe
this is relevant to business. This has always been about value
creation and this whole conversation about sustainable
capitalism is not a new movement," Blood said.
"While governments and civil society will need to be part of
the solution to these challenges, ultimately it will be
companies and investors that will mobilise the capital needed to
COMPENSATION AND LOYALTY
To offset the disproportional influence of short-term
traders like hedge funds on global markets, Generation has
proposed the issuance of loyalty-driven securities to reward
investors who nurture real business growth by holding a
company's shares for a number of years.
The blueprint also recommends significant changes in
corporate compensation structures, putting more emphasis on
bonuses linked to multi-year performance instead of individual
Gore said pension funds had a vital role to play in coaxing
their managers to make longer-term investment decisions, which
by extension, could result in a healthier society and planet.
"(They) have a fiduciary obligation to maximise the
long-term performance of their assets to the maturation of their
long term liabilities," Gore said.
"If pension funds turn to managers of their assets and
compensate them with a structure that incentivises them to
maximise performance on an annual basis, they should not be
surprised if that is what their managers end up doing."
Blood said the campaign for sustainable investment had been
hit by worries that change would cost more than it would
ultimately deliver, but many businesses were still to grasp how
value-destructive some elements of modern capitalism had become.
"...in America, as soon as you say the word 'sustainability'
people think of socially-responsible investing, tree-hugging and
we don't believe that at all. We think sustainability is just
best practice in business," he said.