Q&A-Corporate boards suffer 'tyranny of short term' as activists loom

Nov 7 (Reuters) - Increasing pressure from activist shareholders to turn quick profits is overwhelming strategic decision-making in corporate boardrooms, according to Dominic Barton, global managing partner at consultancy McKinsey.

Barton told the Reuters Global Markets Forum on Monday that asset managers in particular are under so much pressure to focus on short-term returns.

Here are edited excerpts from the conversation:

Qu.estion: Describe what you call the “tyranny of the short term.”

Answer: It is the view that capitalism has become more short term in its time frame over the last 30 years and this impacts R&D investment and growth. I think there is pressure on asset managers to deliver short-term returns or risk having money taken out of their firm.

Q: What happens when the short-term profitability goals collide with long-term capital investment plans?

A: You get very interesting board meetings. There is pressure on boards and CEOs to take short-term action while they may want to, in fact, be investing or building more for the long term.

A lot of boards are spending the majority of their time dealing with risk management, audit and regulatory issues ... Spencer Stuart research suggests many Fortune 100 boards are spending less than 10 percent of their time on strategy and long-term issues.

Furthermore, many boards are nervous about activists and therefore want to make sure they are ensuring the management team is delivering in the short term.

Q: Is shareholder activism a bad thing?

A: I see shareholder activism like cholesterol. There is good cholesterol and bad cholesterol. Activism is appropriate and helpful for improving longer-term performance and some is extremely unhelpful.

Q: How are boards adapting?

A: My sense is that the profile of boards has changed. I think there is more of a “professional class” of board members who want to continue to be board members on multiple boards.

Q: What should boards and management do when they discover an activist is taking an interest?

A: The CEO’s first reaction is quite important i.e. listen and be open to the good suggestions and don’t dismiss the whole thing, while at the same time saying there are some boundaries.

Also set up a process so that the board can digest and handle the situation. When a CEO panics, it usually ends badly.

This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform. For more information on the forum or to join the conversation, follow this link: here Reporting by John Tilak in Toronto; Editing by Jeffrey Benkoe