In his Strategy Snack for yesterday, October 29, 2013 in the Strategic Management Bureau, Paul Barnett tells the story of an exchange he had with Professor Malcolm McDonald of Cranfield University over the use of shareholder value as a measure of corporate performance. Professor McDonald defended its use, while Paul offered this observation:
"Between 1975 and 2010, the average period for holding shares on the New York Stock Exchange declined from six years to about six months."
Around 1975 is when Pensions, following the lead of Foundations, applying the newest reinterpretation of the fiduciary standards of prudence by the Uniform Management of Institutional Funds Act, first started trading in securities, seeking equity rates of total return. Up until then, Pensions invested mostly in buy-and-hold bonds, with some dividend stocks.
By 2010, Pensions had grown to control approximately $30 Trillion USD of our collective retirement savings, representing about half the total value of all Global Equities.
Between 1975 and 2010 the default form of investment became securities trading, and the standard practice of securities trading morphed from buy-and-hold to buy-low-to-sell-high to buy-high-to-sell-higher. Along the way, the shelf life of trading positions got shorter and shorter. We got the current state of short-termism, with all its many complications for pensions, for the markets, and for us all.
Is there a connection between the change of pension investing to securities trading, the growth in savings entrusted to pensions and the increase in short-termism, or is it all just a coincidence?
Let's assume it is not coincidence. Let's assume it is a causal connection, that pensions as large and powerful investors are driving short-termism, and the current obsession with quarterly earnings and "maximizing shareholder value" as the single point of value by which corporate performance is measured.
Let's assume this is a problem and that it needs to be fixed. Finally, let's assume that to fix this problem, we have to bifurcate the narratives on investment and wealth creation. We need to have one narrative for the new form of pension investor, for sound pension investment and for effective pension leadership. We need to have another narrative for the old form of retail investor, for sound corporate investment and for effective corporate leadership.
The corporate narrative can continue to be the familiar story of fractionalized shares, diversified portfolios, and measuring wealth creation only indirectly, through growth in share price.
The pension narrative must be different. It must begin with the special purpose and the special power that pensions have as stewards of our income security in retirement across the generations. It must build a new form of investment to fit the special purposes of this new form and investor. It must measure wealth creation directly, as cash flow generation through adaptive co-creation in a robust, resilient and regenerative economy that evolves over time, through an open-ended and ongoing process of change, and adaptation to change, through innovation and transformation.
How can we use the Public Humanities to help us bifurcate this narrative, and bring an end to short-termism, with its many complications?