Posts from: Ariel Babcock

Tailoring Executive Pay for Long-Term Success

Posted by Matt Brady, Matt Leatherman, and Victoria Tellez, FCLTGlobal, on

Sunday, March 28, 2021

Compensation guidelines, Executive Compensation, Executive performance, Incentives, International corporate governance, Long-Term value, Short-termism
More from: Ariel Babcock, Matthew Brady, Matthew Leatherman, Victoria Tellez, FCLTGlobal

Matt Brady is associate director of research, Matt Leatherman is director, and Victoria Tellez is senior research associate at FCLTGlobal. This post is based on an FCLTGlobal memorandum by Mr. Brady, Mr. Leatherman, Ms. Tellez, and Ariel Babcock. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Short-term incentives motivate short-term behavior. Corporate boards can drive long-term performance by making changes to remuneration that encourage long-term behavior by executives while avoiding common pitfalls. Similarly, investors can support long-term executive remuneration plans through their votes and engagement.

Financial incentives motivate behavior—indeed, financial incentives may work too well. Executive pay is focused on a short time horizon—with recent data pegging average duration of executive compensation plans for CEOs of MSCI All Country World Index (ACWI) constituents at 1.7 years. [1] This short-term focus can have far-reaching consequences, yet setting out to make remuneration longer-term is no simple task.

How Executives Can Help Sustain Value Creation for the Long Term

Posted by Kevin Sneader and Tim Koller (McKinsey & Company) and Sarah Keohane Williamson (FCLTGlobal), on

Monday, October 19, 2020

Boards of Directors, Capital allocation, Executive Compensation, Executive performance, Long-Term value, Management, Manager characteristics, Shareholder value, Short-termism, Stakeholders
More from: Ariel Babcock, Kevin Sneader, Sarah Keohane Williamson, Tim Koller, Victoria Potter, FCLTGlobal, McKinsey

Kevin Sneader is the global managing partner of McKinsey & Company; Sarah Keohane Williamson is the CEO of FCLTGlobal; and Tim Koller is a partner with McKinsey & Company. This post is based on a recent McKinsey article by Mr. Sneader, Ms. Williamson, Mr. Koller, Victoria Potter, and Ariel Babcock.

Ample evidence shows that when executives consistently make decisions and investments with long-term objectives in mind, their companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. Addressing the interests of employees, customers, and other stakeholders also brings about better long-term performance. The future, it seems, should belong to leaders who have a long-term orientation and accept the importance of treating various stakeholders fairly.

Nevertheless, our research shows that behavior geared toward short-term benefits has risen in recent years. In a recent survey conducted by FCLTGlobal and McKinsey, executives say they continue to feel pressure from shareholders and directors to meet their near-term earnings targets at the expense of strategies designed for the long term. Managers say they believe their CEOs would redirect capital and other resources, such as talent, away from strategic initiatives just to meet short-term financial goals.

Funding the Future: Investing in Long-Horizon Innovation

Posted by Sarah Williamson, Ariel Babcock, and Allen He, FCLTGlobal, on

Thursday, September 17, 2020

Capital requirements, Incentives, Innovation, Long-Term value, R&D, Risk-taking, Shareholder value
More from: Allen He, Ariel Babcock, Sarah Williamson, FCLTGlobal

Sarah Keohane Williamson is CEO, Ariel Babcock is Head of Research, and Allen He is Associate Director at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here).

Executive Summary

Effective long-term capital allocation is fundamental for innovating and creating value; investment in research and development (R&D) fuels this growth. Successful R&D can be transformational for an organization and for broader society. But while worldwide spending on R&D has slowly increased, R&D returns have been declining. What’s driving this decline? Emerging evidence suggests a short-term mindset lies at the heart of this puzzle.

R&D spending, especially long-horizon R&D project spending, faces a unique set of short-term pressures relative to other types of long-term investment. When facing short-term financial pressures, behavioral biases including manager risk aversion and uncertainty around forecasting potential future returns (among other things) lead to a tendency among management teams to cut long-horizon projects first. The declining tenure of managers, the lack of innovation-linked metrics in incentive compensation plans, the typically asymmetric return profile of long-horizon projects, and an investment community that often ignores the potential impact of long-horizon innovation spending in a company’s valuation analysis all contribute to this problem.

Funding the Future: Investing in Long-Horizon Innovation

Posted by Sarah Keohane Williamson, Ariel Babcock, and Allen He, FCLTGlobal, on

Tuesday, August 25, 2020

Capital allocation, Executive Compensation, Firm performance, Incentives, Innovation, Long-Term value, Management, R&D, Short-termism
More from: Allen He, Ariel Babcock, Sarah Keohane Williamson, FCLTGlobal

Sarah Keohane Williamson is CEO, Ariel Babcock is Head of Research, and Allen He is Associate Director at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes The Uneasy Case for Favoring Long-term Shareholders by Jesse M. Fried (discussed on the Forum here).

Executive Summary

Building Long Term Value: A Blue Print for CFOs

Posted by Bruce Shaw, Ariel Babcock, and Victoria Tellez, FCLTGlobal, on

Tuesday, January 21, 2020

Accounting, Boards of Directors, CFOs, Financial reporting, Forecasting, Long-Term value, Risk, Risk assessment, Risk management, Short-termism
More from: Ariel Babcock, Bruce Shaw, Victoria Tellez, FCLTGlobal

Bruce Shaw and Ariel Babcock are Managing Directors, Research and Victoria Tellez is a Research Associate at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Executive Summary

Operating at the nexus of short-term performance pressures and the behaviors that promote long-term value creation within the firm, the chief financial officer (CFO) has a unique ability to drive long-term value creation for the organization. Among their growing set of responsibilities, CFOs and their teams report company financial results, communicate with and field questions from investors, secure financing to fund corporate strategies, and act as a strategic resource for the chief executive officer (CEO) and board of directors.

CFOs need to manage legitimate short-term performance pressures and, at the same time, advocate for capital allocation decisions with long-term benefits, even if potential contributions to corporate earnings are years in the future. CFOs are essential to driving long-term behaviors and are in a unique position to make a meaningful difference. According to one leading academic, “There’s a huge opportunity for CFOs to focus firms on what truly matters.”

Posts from: Ariel Babcock

Tailoring Executive Pay for Long-Term Success

How Executives Can Help Sustain Value Creation for the Long Term

Funding the Future: Investing in Long-Horizon Innovation

Executive Summary

Funding the Future: Investing in Long-Horizon Innovation

Executive Summary

Building Long Term Value: A Blue Print for CFOs

Executive Summary

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