Published February 16, 2012
Former U.S. Vice President Al Gore wants to end quarterly company reporting 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 for irresponsible short-term investment.
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 economic growth.
"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 overcome them."
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 fiscal years.
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.