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Aug 18, 2023

Communicating to investors how short-term events impact long-term plans

Daryl Brewster discusses the benefits and challenges of integrated long-term planning with former Vanguard CEO Bill McNabb

You were recently part of a CECP CEO Roundtable with Vincent Forlenza, chair of Moody’s and former chair and CEO of BD, about the process and value of developing and presenting an integrated long-term plan from the CEO and investor perspectives. What are some of the challenges you discussed about balancing long-term planning with short-term demands?

What investors are looking for from boards, and from executive management, is strategic agility and managing for the long term. For example, how are short-term issues framed against long-term aspirations? This information is valuable because short-term thinking only attracts short-term investors. With close to 30 percent of company holdings owned by index funds, it is essential for companies to communicate an authentic long-term vision of how they are going to sustainably perform over time when looking to attract long-term investors.

CEOs need to explain to investors how new developments and mega-trends impact a company’s long-term strategy. By its nature, an integrated long-term plan should not change much, though CEOs and boards need to be prepared to pivot when the unexpected happens. Equally importantly, they need to communicate to investors how events in the short term are expected to impact plans in the long term. Some of those elements include board governance, sustainability and more.

Bill McNabb

From an investor perspective, what are some of the best benefits of distilling and communicating long-term plans or sustainable business strategies?

Integrated long-term plans can really open a dialogue with more long-term value activist investors, namely because ESG strategies need to create value and acknowledge risk. Long-term risks from things like technological advances or climate change will eventually materialize and investors may want to think about how a business is mitigating those risks.

To establish trust with these long-term investors, companies might consider whether they want to communicate with various stakeholders authentically and transparently about those financial and long-term material risks. The company can then report on metrics that matter from an investing point of view. The business can also demonstrate how it is bringing together internal resources – such as accounting, working with the CFO and adhering to international regulations – to show holistically where it’s headed over the long term. It is about creating vibrant discussion around these types of issues, and companies will eventually end up in a much better place.

As we consider current long-term planning and reporting standards, it’s important to note that the average sustainability report, published by 90 percent of companies each year, is a whopping 211 pages. It would be great to hear how you are thinking about sustainability reporting and what successfully embedding ESG into a company looks like.

I think sustainability reporting has gone out of control, to be blunt. Companies are institutions that are more trusted than the government and while different constituents may be looking for other solutions outside of companies, those businesses may be a source of those solutions. I think the SEC proposals will not solve a lot of the current issues because these sustainability practices need to be tightly woven into the company’s strategy, so they become a part of the fabric of the company.

Sustainability practices shouldn’t be a box-checking exercise that is a separate part of the process because companies need to consider all stakeholders. When I think about how we ran Vanguard, we regularly discussed inside the company that we serve three different stakeholders: shareholder/investor (clients), crew (employees) and community (corporate citizenship). And it’s never been about politics – it’s just about running a great company.

Bill McNabb is former chair and CEO of Vanguard and a board member of IBM, United Health Group and CECP. Daryl Brewster is CEO of CECP