Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Tuesday, July 25, 2006

New Report on Long-Term Value

The CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics issued a 23-page report yesterday entited, "Breaking the Short-Term Cycle: Discussion and Recommendations on How Corporate Leaders, Asset Managers, Investors and Analysts Can Refocus on Long-Term Value." The groups summarized the recommendationsin the report as follows:
1. "Reform earnings guidance practices." The groups recommended that the practice of providing quarterly guidance be terminated or, if necessary, be consistent and in the form of appropriate ranges.
2. "Determine long-term incentives across the board," meaning that the compensation targets for executives and asset managers should focus on long-term measures rather than short term. This would address a widely-perceived problem that earnings management from one year to the next may occur in order to achieve performance goals for bonus payouts.
3. "Demonstrate leadership in shifting the focus to long-term value creation." Among the recommendations here is that management support analysts who use long-term models.
4. "Improve communications and transparency." Increased frequency, plain language and long-term investment statements are recommended.
5. "Promote broad education of all market participants about the benefits of long-term thinking and the costs of short-term thinking." Engage in dialogue with investors and analysts to help them understand your industry and educate both institutional and individual investors on long-term investing.

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