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Investors’ request for long-term value creation is a big present for companies

Investors’ request for long-term value creation is a...

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Investors’ request for long-term value creation is a big present for companies

Institutional investors urge Dutch listed companies to focus more on long-term value creation, both in their strategies and in corporate reports. Our recent KPMG-study, Extending Horizons, shows that most companies are not able to meet this investor demand. However, companies that consider the call from investors to become more long term oriented as a strategic opportunity to define a value creation model and strategy that embraces a long-term and multi-stakeholder view in order to balance their short, medium and long term business performance, will value it as a big present from Eumedion.

In their 2019 Focus Letter, ‘Speerpuntenbrief’, to listed companies, Dutch investor representative body Eumedion has requested all listed companies in the Netherlands to focus disclosures in their annual report, amongst others, on long-term value creation. This will be one of Eumedion’s key focus areas for the 2019 shareholder engagement season. Eumedion asks Boards of listed companies to incorporate in the management report a more detailed explanation of its view on long-term value creation and the strategy for its realization. In addition, they would also like to understand to what extent the outcomes of engagements with stakeholders affected the board assessment of the long-term sustainability of the company’s business model and strategy.

This is a most encouraging request by Eumedion – not so much because it addresses the Corporate Governance Code requirements, but mostly because this is an opportunity for companies to take long-term value creation to the heart of their business. Eumedion’s call for focus on the long-term fits into a broader global trend among institutional investors towards more attention for the strategic framework for long-term value creation of companies. Driven by large institutional investors such as BlackRock, Vanguard and APG, it is aimed at driving strategic shareholder engagement for long-term success.
For companies, this means that whereas in the past, investor dialogue may have been geared towards the information needs of short-term oriented investors and sell-side analysts, they now increasingly need to respond to investors that are interested in the long term viability of their overall performance.

Is there such a need for this request from Eumedion? Yes, there is: our recent KPMG study, Extending Horizons, shows that reporting about long term value creation among Dutch listed companies is still in its infancy. Only 43% of the companies included in the study disclose a long term strategy in their annual reports – even though it is a requirement of the revised Dutch corporate governance code. Most companies do not yet report beyond their two- to three-year strategic planning horizon. In addition, almost half of Dutch listed companies do not fully report on their long-term business drivers and corresponding business risks and opportunities. And furthermore, our findings show that only 15% of the companies surveyed indicate how they have taken stakeholder interests into consideration in their long-term strategy development process and/or when making relevant strategic decisions during the book year.

There is definitely room for improvement as the numbers tell. From experience we know that it appears to be very challenging to define the value creation model and what long-term value creation means for the company. If one looks at annual reports for companies who report a value creation model, it will show in a number of cases different value creation models over the years – which logically cannot be true. So there is a challenge – but also a big opportunity if companies take it that way.…

It is vital for companies not to respond to these investor demands by only changing investor communications and the content in their annual and sustainability reports. Underlying the call from investors to focus more on long term value creation are structural trends that could impact the strategy development process of a company and accelerate or constrain the strategy execution. For example, the increasing relevance of intangible assets such as trust, stakeholder relationships and network capital as sources of competitive advantage, the expanding role of corporations in society, increasing shareholder activism and changing corporate governance requirements in key global economies are all elements to be taken into account when considering the long-term value creation of the company. Taking the request of Eumedion as a strategic request can drive understanding, strategy and management in a very positive way.

In our view four broad basic principles apply to become more long term oriented:

  1. Creating a clear purpose, beyond maximizing shareholder value, and a corresponding long-term strategy to operationalize and embed this purpose in daily business. For its long-term financial success, it is vital that a company creates also value for its stakeholders. 
  2. Developing performance metrics that measure not only the near-financial performance of the company, but also the ability to create economic and stakeholder value on the medium and longer term – i.e. health metrics such as innovation, brand, employee quality, to name a few. Such forward looking metrics enable senior management to balance short and long term performance of the company.
  3. Integrating existing stakeholder engagement processes into the strategy planning cycle of the company. In many companies we see that processes to identify, assess and manage stakeholder interests are driven by other departments than the ones that are responsible for the corporate/business unit strategies. 
  4. Finally, integrating information on the long-term performance of the company in all communications to capital markets. Investors are generally looking for information and metrics about the future success of the business and variability of the earnings. So a balance between short-term and long-term information, disclosing forward looking metrics and reporting about value created for key stakeholders. 

We encourage all companies to take the request from Eumedion as a strategic opportunity to gain a broader and longer-term perspective on the success of their business.

More information
Please contact one of the following people:

  • Wim Bartels, +31 20 656 7783 or by email
  • Mark Vaessen, +31 20 656 4352 or by email
  • Lars Kurznack, +31 20 656 2497 or by email

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