PERSPECTIVES on the LONG TERM Building a Stronger Foundation for Tomorrow PERSPECTIVES on the LONG TERM Building a Stronger Foundation for Tomorrow

PERSPECTIVES ON THE LONG TERM Building a Stronger Foundation for Tomorrow PERSPECTIVES ON THE LONG TERM Building a Stronger Foundation for Tomorrow Focusing Capital on the Long Term is an initiative for advancing practical actions to focus business and markets on the long term. It was founded by the Canada Pension Plan Investment Board and McKinsey & Company. CONTENTS INTRODUCTION LEADING A Time for Action Long-Term Visions DOMINIC BARTON Cut Short AND MARK WISEMAN 4 NITIN NOHRIA 36 CONTEXT Solving Problems That Matter Our Gambling Culture PAUL POLMAN 42 LAURENCE FINK 8 Generational Restoring Trust Thinking at Cargill In an Era of Change WHITNEY MACMILLAN RICHARD EDELMAN 12 AND GREG PAGE 48 Short-Termism Long-Term Planning And the Threat In a Volatile Environment From Climate Change CHANDA KOCHHAR 53 HENRY M. PAULSON JR. 16 Business and Society Capitalism In the Coming Decades For the Many KATHLEEN MCLAUGHLIN AND DOUG MCMILLON 57 LYNN FORESTER DE ROTHSCHILD 23 The Human Advantage NICHOLAS CARR 28 2 PERSPECTIVES ON THE LONG TERM INVESTING GOVERNING An Unshakable Belief Governance In the Long Term And Stewardship ADRIAN ORR 64 For the Long Term DAVID WALKER 106 Capitalism in The Postfinancial Era Minding the Gaps JOHN D. ROGERS 69 ANGEL GURRÍA 110 GIC’s Long-Term View Long-Termism LIM CHOW KIAT 75 Begins with the Board RONALD P. O’HANLEY 116 Getting Beyond The Data Point Taking the Long View EUAN MUNRO 80 On Africa DONALD KABERUKA 121 Reporting for The 21st Century Building a Board CHARLES TILLEY 84 For the Long Term JULIE HEMBROCK DAUM A Single Ladle from AND EDWARD SPEED ��126 A Flowing Stream LEI ZHANG 90 The Impact Of Regulation Building a ANGELIEN KEMNA 131 Business-Owner Mind-Set AUTHOR INDEX 136 MICHAEL SABIA 94 The Long-Term Imperative for Financial Institutions JAMES P. GORMAN �� 100 PERSPECTIVES ON THE LONG TERM 3 INTRODUCTION / Dominic Barton and Mark Wiseman A Time for Action The short-term thinking that pervades our boardrooms, our executive suites, and our financial markets has been spreading for years, slowly impeding the ability of companies to make the kinds of bold investments in the future that sustainable growth and a vibrant economy require. The financial crisis of 2008 and the global recession that followed, however, brought the issue to the fore and galvanized our two organizations to found Focusing Capital on the Long Term (FCLT), an initiative dedicated to uncovering practical solutions to reverse short-term thinking. Our goal is to reorient individuals and institutions across the investment value chain toward a longer-term and more expansive mind-set that takes into account both immediate goals and the longer-term interests of corporations and society. The FCLT initiative has already helped advance our understanding of the roots of short-termism and how it plays out across the economy. The causes are many, from the “tyranny” of quarterly earnings targets to ill-conceived incentive systems to certain regulations that inhibit the ability to make long-term investments. But our research also shows that business leaders would like to break free of such con- straints. We see this both in broad-based surveys and in the conversations we’ve had with more than 100 CEOs, all of whom tell us that the constant demand to meet 90-day earnings targets has become a straitjacket inhibiting the execution of sustainable, long-term strategies. Board members also feel the pressure. Indeed, a number of public-corporation business leaders we have spoken to are contemplat- ing taking their companies private to escape the yoke of quarterly capitalism. Now is the time to formulate practical solutions that can help put our economic system on a more stable foundation and allocate resources in ways that provide the greatest value for the broadest range of stakeholders. The essays in this book are part of that effort. By providing a platform for views from a wide range of economic actors, including CEOs, board members, investors, and regulators, our aim was to foster a lively conversation about what it will take to change the current system. These are the opinions of the individual authors and not McKinsey & Company, the Canada Pension Plan Investment Board, or the FCLT initiative. But as the essays came together, we’ve been intrigued by how often themes and insights recur. The context for short-term thinking, including the human traits that reinforce it, is one such theme. Laurence Fink, CEO of BlackRock, describes “our gambling culture,” in which the siren song of quick wins—despite what are often much higher long-term costs—has become a societal addiction. Nitin Nohria, dean of Harvard Business School, points to the workings of the human psyche that help make short- term decision making, with its false sheen of certainty, so irresistible. Others dig deep within our institutions to find specific mechanisms of short- termism that can be reengineered to encourage longer-term thinking. For Charles 4 PERSPECTIVES ON THE LONG TERM Tilley, CEO of the Chartered Institute of Management Accountants, part of the answer is to look beyond the columns of quarterly numbers in assessing the health and prospects of an organization to a richer narrative report that lays out a deep understanding of a company’s business model and the factors that might affect it over the long run. Angelien Kemna, chief finance and risk officer of Netherlands- based institutional investor APG, analyzes the ways in which well-meant regulations can have unintended consequences that thwart the ability to take a long-term view of investments. Many of our writers note that what happens in the boardroom has a tremendous influence on management’s ability to execute for the long term. Ronald P. O’Hanley, former president of asset management at Fidelity Investments, outlines specific steps for building a board that supports and enables a long-term strategy. When it comes to long-term investing, many take the view that anything with a time horizon of five years or more qualifies. Others, however, push the timeline further out. Lei Zhang, founder of Hillhouse Capital Management Group in Beijing, doesn’t just invest in companies, he invests in the people who start and run them. The relationships he develops allow him to be deeply involved in strategy at his portfolio companies as they grow and change course over the years. For Zhang, the quarterly earnings report is irrelevant. We believe the world is approaching a tipping point. The memory of a global financial system on the brink of meltdown is still fresh. Now, a consensus is growing that in a globalized, digitized world, our approach to capitalism must evolve if individual savers are to have the confidence that their investments will grow steadily enough to fund a life that includes a home, an education for their children, and a reasonable retirement. We hope that the work of FCLT, of which these essays are a part, will help point the way to building a stronger, more sustainable capitalism for the 21st century. Dominic Barton Mark Wiseman Global Managing Director, President and CEO, McKinsey & Company Canada Pension Plan Investment Board PERSPECTIVES ON THE LONG TERM 5 CONTEXT Our Gambling Culture LAURENCE FINK .........................................................................................................8 Restoring Trust In an Era of Change RICHARD EDELMAN.................................................................................................. 12 Short-Termism and the Threat from Climate Change HENRY M. PAULSON JR. ........................................................................................... 16 Capitalism For the Many LYNN FORESTER DE ROTHSCHILD ...........................................................................23 The Human Advantage NICHOLAS CARR ......................................................................................................28 PERSPECTIVES ON THE LONG TERM 7 CONTEXT / Laurence Fink We tend to speak of short-termism as though it’s a problem that only afflicts investors or corporate leaders, but that’s not the Our case. Short-term thinking pervades our most important institutions, from government to households. We’ve created a gambling culture in which we tune out everything except the Gambling most immediate outcomes. If we’re going to meet our commitments to our children and grandchildren, and to society as a whole, we need to open up the lens and start taking a Culture more responsible, longer-term view of the challenges we face. The craving for immediate There’s a host of reasons short-termism gratification has spread well has taken hold in our culture, both in the beyond Wall Street. United States and more broadly. Greed and the media’s reliance on daily bombardments of bad news certainly play a part, but more important, we’ve lost sight of our actual goals. It’s in everyone’s interest to provide opportunities for education, a reasonable level of healthcare, and a secure retirement for the most people possible, just as we should all be working to conserve our natural resources to assure that clean air, clean water, and renewable fuel sources are avail- able to our children. Instead, we’ve become mesmerized by the possibility of short-term, one-off gains. There’s a chicken-and-egg problem at work. In many cases, there is a serious misalign- ment of incentives. Instead of encouraging our institutions and our leaders to grapple effectively with complex, long-term

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