PERSPECTIVES ON THE LONG TERMBuilding a Stronger Foundation for Tomorrow

Focusing Capital on the Long Term is an initiative for advancing practical actions to focus business and markets on the long term. It was founded by the Canada Pension Plan Investment Board and McKinsey & Company.

PERSPECTIVES ON THE LONG TERMBuilding a Stronger Foundation for Tomorrow

2!PERSPECTIVES ON THE LONG TERM

INTRODUCTION

A Time for ActionDOMINIC BARTON AND MARK WISEMAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

CONTEXT

Our Gambling CultureLAURENCE FINK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Restoring Trust In an Era of ChangeRICHARD EDELMAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Short-Termism And the Threat From Climate ChangeHENRY M. PAULSON JR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Capitalism For the ManyLYNN FORESTER DE ROTHSCHILD . . . . . . . . . . . . . . . . . . . . . 23

The Human AdvantageNICHOLAS CARR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

LEADING

Long-Term Visions Cut ShortNITIN NOHRIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Solving Problems That MatterPAUL POLMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Generational Thinking at CargillWHITNEY MACMILLAN AND GREG PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Long-Term Planning In a Volatile EnvironmentCHANDA KOCHHAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Business and Society In the Coming DecadesKATHLEEN MCLAUGHLIN AND DOUG MCMILLON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

CONTENTS

PERSPECTIVES ON THE LONG TERM!3

INVESTING

An Unshakable Belief In the Long TermADRIAN ORR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Capitalism in The Postfinancial EraJOHN D. ROGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

GIC’s Long-Term ViewLIM CHOW KIAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Getting Beyond The Data PointEUAN MUNRO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Reporting for The 21st CenturyCHARLES TILLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

A Single Ladle from A Flowing Stream LEI ZHANG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Building a Business-Owner Mind-SetMICHAEL SABIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

The Long-Term Imperative for Financial InstitutionsJAMES P. GORMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

GOVERNING

Governance And Stewardship For the Long TermDAVID WALKER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Minding the Gaps ANGEL GURRÍA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Long-Termism Begins with the BoardRONALD P. O’HANLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Taking the Long View On AfricaDONALD KABERUKA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Building a Board For the Long TermJULIE HEMBROCK DAUM AND EDWARD SPEED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

The Impact Of Regulation ANGELIEN KEMNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

AUTHOR INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

4!PERSPECTIVES ON THE LONG TERM

INTRODUCTION / Dominic Barton and Mark Wiseman

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A Time for Action

PERSPECTIVES ON THE LONG TERM!5

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Dominic BartonGlobal Managing Director, McKinsey & Company

Mark WisemanPresident and CEO, Canada Pension Plan Investment Board

PERSPECTIVES ON THE LONG TERM!7

CONTEXT

Our Gambling CultureLAURENCE FINK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Restoring Trust In an Era of ChangeRICHARD EDELMAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Short-Termism and the Threat from Climate ChangeHENRY M. PAULSON JR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Capitalism For the ManyLYNN FORESTER DE ROTHSCHILD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The Human AdvantageNICHOLAS CARR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

8!PERSPECTIVES ON THE LONG TERM

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Our Gambling CultureThe craving for immediate gratification has spread well beyond Wall Street.

Laurence Fink is the chairman and CEO of BlackRock, which he has led since its founding in 1988. Previously, he was a managing director of First Boston. Fink is also cochairman of Partnership for New York City, which works with the business community to advance the city’s economy and maintain its position as the center of world commerce, finance, and innovation. Fink earned both a BA and an MBA from University of California, Los Angeles.

CONTEXT / Laurence Fink

PERSPECTIVES ON THE LONG TERM!9

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Instead of encouraging our institutions and our leaders to grapple effectively with complex, long-term challenges,we’re rewarding them to do the opposite.

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CONTEXT

So how do we fight back against short-termism? I believe the most effective antidote lies in more education and more communication—and more leadership.

PERSPECTIVES ON THE LONG TERM!11

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What Investors WantIn 2014, Laurence Fink sent a letter to the CEOs of all companies in the S&P 500 stock index, urging them to take a longer-term outlook on strategy and build engagement with investors. BlackRock is doing its part to make sure that communication happens. As the world’s largest asset manager, with some $4 trillion under management, it devotes enormous resources to engaging with boards and driving better communication with its approximately 14,000 portfolio companies. Here’s some of what it looks for:A framework for investors. A long-term strategy is critical. Investors need a detailed understanding of the strategy, as well as benchmarks, milestones, and metrics for assessing performance.

A clear articulation of the risks. Investors want to know exactly what the risks are and how corporate leaders intend to manage them.Proactive rather than reactive communication. Corporate leaders should not wait to be asked the right questions by Wall Street analysts or investors. Rather, they should take control of the conversation and communicate the strategy.Filings that don’t hide behind numbers. Even US Securities and Exchange Commission filings are an opportunity to communicate. BlackRock would like to see more clear prose in these reports rather than just technical, legalistic jargon and columns of numbers.Learn from your mistakes. They happen to everyone. Investors want to see a mea culpa and, more important, a clear explanation of the fix.

That kind of ongoing conversation can serve as a deterrent against getting caught up in the lure of fleeting gains.

12!PERSPECTIVES ON THE LONG TERM

Restoring Trust In an Era of ChangeNow is the time to address the world’s complex challenges with solutions based on the long-term good. But first we must rebuild faith in leaders and institutions.

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CONTEXT / Richard Edelman

Richard Edelman is the president and CEO of Edelman, the world’s largest public-relations firm. He has extensive experience in marketing and reputation management and has counseled several countries on economic-development programs, including Egypt, Israel, and Mexico. As the creator of the annual Edelman Trust Barometer, Edelman has become an authority on trust in business, government, media, and nongovernmental organizations. He holds an MBA from Harvard Business School and a BA from Harvard College.

PERSPECTIVES ON THE LONG TERM!13

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Trust is no longer earned by quantitative operational metrics—such as company profits—but by the values the company or country exhibits through its actions.

14!PERSPECTIVES ON THE LONG TERM

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CONTEXT

CEOs must take on the new job of chief engagement officer, going beyond the transactional nature of business and forging relationships that build trust.

PERSPECTIVES ON THE LONG TERM!15

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The Occupy movement was a vivid sign of a growing popular distrust of Wall Street.

16!PERSPECTIVES ON THE LONG TERM

CONTEXT / Henry M. Paulson Jr.

Short-Termism And the Threat from Climate ChangeBy not acting now, we’re allowing the future costs of the greenhouse-gas crisis to compound. Eventually, the consequences will be irreversible.

It’s fitting to gather YLHZV�RQ�WKH�ORQJ�WHUP�IRU�D�EXVLQHVV�DXGLHQFH��JLYHQ�WKH�SHUYDVLYH�VKRUW�WHUP�SUHVVXUHV�&(2V�DUH�XQGHU�WR�GHP-RQVWUDWH�SHUIRUPDQFH��:H�DOO�NQRZ�WKDW�RXW-VWDQGLQJ�FRPSDQLHV�DQG�UHDO�YDOXH�FDQ�RQO\�EH�EXLOW�RYHU�WKH�ORQJ�WHUP��7KH�FKDOOHQJH�IRU�D�&(2�LV�WR�EDODQFH�WKH�GULYH�IRU�ORQJ�WHUP�JRDOV�ZLWK�WKH�QHHG�WR�NHHS�WKH�RUJDQL]DWLRQ�VWURQJ�LQ�WKH�KHUH�DQG�QRZ�7KDW�MRE�LV�PDGH�HYHQ�KDUGHU�EHFDXVH�WKH�

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LEARNING FROM THE FINANCIAL CRISIS&OLPDWH�FKDQJH�LV�ZKHUH�VKRUW�WHUP�WKLQNLQJ�DQG�ORQJ�WHUP�FRQVHTXHQFHV�FROOLGH�IRU�EXVL-QHVVHV�DQG�JRYHUQPHQWV�DOLNH��0HHWLQJ�WKH�FKDOOHQJH�RI�FOLPDWH�FKDQJH�FDOOV�RQ�ERWK�WR�DVVHVV�WKH�ULVNV�DQG�DFW�EHIRUH�WKH�HFRQRPLF�DQG�HQYLURQPHQWDO�FRQVHTXHQFHV�RI�IDLOXUH�DUH�LUUHYHUVLEOH��$V�VRPHRQH�ZKR�KDV�VSHQW�D�

Henry M. Paulson Jr. is a businessman, China expert, conservationist, and author. He is the founder and chairman of the Paulson Institute, which aims to advance sustainable economic growth, a cleaner environment, and cross-border investments in the United States and China. Paulson served as secretary of the treasury under President George W. Bush and before that was chairman and CEO of Goldman Sachs.

PERSPECTIVES ON THE LONG TERM!17

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Climate change is where short-term thinking and long-term consequences collide for businesses and governments alike.

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Climate change is not just an issue that poses significant economic risk for businesses; it also poses a huge fiscal risk to the United States.

CONTEXT

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This roller coaster in the surf off a New Jersey beach became an iconic image of Hurricane Sandy—and a sign of the destructive force of climate change, which drives rising sea levels and more powerful storms.

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CONTEXT

Climate Change in our LifetimeTo assess the risks of rising temperatures, the Risky Business Project relied on analysis of both high- and low-probability outcomes and the economic consequences on a regional basis, as well as for specific sectors of the economy. Those costs included the loss of property along coastlines due to rising sea levels and increases in hurricane activity, changes in commodity-crop yields attributable to temperature and precipitation changes, and increased electricity demand corresponding to hotter days across much of the continental United States. The research found additional costs associated with heat-related mortality and losses in labor productivity.

To illustrate how profound and rapid these

changes might be, the Risky Business Project mapped the increase in the average number of days per year with temperatures over 95 degrees Fahrenheit across the United States over the course of a lifetime for a child born in 1981, assuming our current trajectory. As the heat maps show, such a child could be born in one climate and die in another that’s quite different, without ever moving from the region (exhibit).

The Risky Business Project, chaired by Michael Bloomberg, Henry Paulson, and Tom Steyer, is a partnership dedicated to quantifying and publicizing the economic risks of climate change. The results of that research can be found at riskybusiness.org.

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Average Days Over 95°F: Projections Mapped Over a Lifetime

Heat map key: Average days per year over 95°F

On our current path, the US will likely see significantly more days above 95°F each year. Some regions of the country will be hit far harder by extreme heat than others, and some will experience rising temperatures in terms of warmer winters rather than unbearable summers. But by the end of this century, the average American will likely see 45 to 96 days per year over 95°F.

Adulthood2040 – 2059

Retirement2080 – 2099

College2020 – 2039

Birth1981 – 2010

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It’s time for the United States to get its house in order through policies to curb and price carbon emissions.

CONTEXT

PERSPECTIVES ON THE LONG TERM!23

Capitalism For the ManyIt’s time to relevel the playing field and extend the benefits of our economic system.

These are not�WKH�EHVW�RI�WLPHV�IRU�FDSLWDO-LVP��:H�KDYH�IUHH�DQG�RSHQ�PDUNHWV�WR�WKDQN�IRU�WKH�UDSLG�JURZWK�LQ�LQFRPHV�DQG�OLYLQJ�VWDQGDUGV�RYHU�WKH�ODVW�WKUHH�FHQWXULHV��<HW�LQ�UHFHQW�GHFDGHV��FDSLWDOLVP�KDV�ORVW�LWV�OXVWHU�DQG�LV�QR�ORQJHU�YLHZHG�DV�D�VXUH�SDWK�IRU�WKH�IDLU�GLVWULEXWLRQ�RI�SURVSHULW\��:DJHV�IRU�PDQ\�ZRUNHUV�KDYH�VWDJQDWHG��ZKLOH�WKH�IRU-WXQHV�RI�WKH�YHU\�ULFK�KDYH�PXOWLSOLHG��5LVLQJ�LQHTXDOLW\�LV�DPSOLI\LQJ�VRFLDO�GLYLVLRQV��8QIHWWHUHG�FDSLWDOLVP�GHVHUYHV�FRQVLGHUDEOH�EODPH�IRU�LWV�UROH�LQ�FULVHV�RI�WKH�SDVW�DV�ZHOO�DV�WKRVH�WKDW�DUH�VWLOO�LQ�WKH�PDNLQJ��IRU�GDP-DJLQJ�VKRFNV�WR�WKH�JOREDO�¿QDQFLDO�V\VWHP��IRU�GDPDJH�WR�WKH�QDWXUDO�HQYLURQPHQW��DQG�IRU�ORZ�OHYHOV�RI�WUXVW�DQG�RSWLPLVP�LQ�RXU�VRFLHWLHV��,W�VKRXOG�FRPH�DV�QR�VXUSULVH��WKHQ��WKDW�

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Lynn Forester de Rothschild

Lynn Forester de Rothschild is the CEO of E.L. Rothschild and cofounder of the Coalition for Inclusive Capitalism. She has served as cochair of FieldFresh, an initiative to develop the agricultural sector in India, and as president and CEO of FirstMark Holdings. Rothschild is a director of both the Estée Lauder Companies and the Economist Newspaper, where she serves on the audit committee. She graduated from Pomona College and earned a law degree from Columbia University.

24!PERSPECTIVES ON THE LONG TERM

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CONTEXT

A capitalism that is equitable, sustainable, and inclusive is one that will persist and enrich well into the future.

PERSPECTIVES ON THE LONG TERM!25

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The bargain struck between business and society has broken down. In its place has grown the dogma of shareholder primacy.

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CONTEXT

Educational, vocational, operational, and apprenticeship programs could refresh the supply of skilled workers corporations need and mitigate unemployment and inequality.

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If capitalism is to have a bright future, it must once again become truly inclusive.

��³$OO�LW�QHHGV�LV�ORYH�´�Economist��1RYHPEHU�����������HFRQRPLVW�FRP�2�/\QQ�6WRXW��The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public��¿UVW�HGLWLRQ��6DQ�)UDQFLVFR��&$��%HUUHWW�.RHKOHU�3XEOLVKHUV���������3UHVLGHQW�%LOO�&OLQWRQ��NH\QRWH�DGGUHVV��&RQIHUHQFH�RQ�,QFOXVLYH�&DSLWDOLVP��/RQGRQ��0D\�����������FRQIHUHQFHRQLQFOXVLYHFDSLWDOLVP���� �FRP�� Making Capitalism More Inclusive: Selected Speeches and Essays from Participants at the Conference on Inclusive Capitalism��'LDQD�&DUQH\�DQG�&KU\VWLD�)UHHODQG��HGV���¿UVW�HGLWLRQ��/RQGRQ��8QLWHG�.LQJGRP��&RDOLWLRQ�IRU�,QFOXVLYH�&DSLWDOLVP��-XO\��������0LOWRQ�)ULHGPDQ��Capitalism and Freedom: Fortieth Anniversary Edition��WKLUG�HGLWLRQ��&KLFDJR��,/��8QLYHUVLW\�RI�&KLFDJR�3UHVV���������*RUGRQ�&ODUN��$QGUHDV�)HLQHU��DQG�0LFKDHO�9LHKV��From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance��6PLWK�6FKRRO�RI�(QWHUSULVH�DQG�WKH�(QYLURQPHQW��8QLYHUVLW\�RI�2[IRUG�DQG�$UDEHVTXH�$VVHW�0DQDJHPHQW��6HSWHPEHU�������VPLWKVFKRRO�R[�DF�XN�7�$QG\�*URYH��³+RZ�$PHULFD�FDQ�FUHDWH�MREV�´�Bloomberg Businessweek��-XO\����������EXVLQHVVZHHN�FRP���+LODU\�6WHHGPDQ��³$SSUHQWLFHVKLS��5HPDNLQJ�DQ�ROG�LGHD�IRU�D�QHZ�HUD�´�PFNLQVH\RQVRFLHW\�FRP���������³3UHVLGHQW�2EDPD�DQQRXQFHV�QHZ�DFWLRQV�WR�IXUWKHU�VWUHQJWKHQ�86�PDQXIDFWXULQJ�´�2I¿FH�RI�WKH�3UHVV�6HFUHWDU\��WKH�:KLWH�+RXVH��2FWREHU�����������ZKLWHKRXVH�JRY����³3UHVLGHQW�2EDPD�DQQRXQFHV�QHZ�DFWLRQV�WR�IXUWKHU�VWUHQJWKHQ�86�PDQXIDFWXULQJ�´

28!PERSPECTIVES ON THE LONG TERM

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The Human AdvantageComputers can do a lot. But only people can think deeply and take the long view.

CONTEXT / Nicholas Carr

Nicholas Carr writes on technology, business, and culture. His books include The Glass Cage: Automation and Us; The Shallows: What the Internet Is Doing to Our Brains; The Big Switch: Rewiring the World from Edison to Google; and Does IT Matter? Information Technology and the Corrosion of Competitive Advantage. He is a contributor to many periodicals, including the Atlantic, Financial Times, New York Times, Wall Street Journal, and Wired. Carr was formerly executive editor of the Harvard Business Review.

PERSPECTIVES ON THE LONG TERM!29

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Robots, however fast and precise they may be, can’t match the talents or replicate the insights of human experts.

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An inability to concentrate on one problem or idea over an extended period impedes the most profound forms of creativity, the ones that lead to counterintuitive insights and momentous breakthroughs.

CONTEXT

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%XVLQHVVHV�DQG�RWKHU�RUJDQL]DWLRQV�KDYH�EHHQ�FRPSOLFLW�LQ�HQFRXUDJLQJ�VKDOORZ�DQG�GLVWUDFWHG�WKLQNLQJ��7DFLWO\�RU�H[SOLFLWO\��H[HFXWLYHV�DQG�PDQDJHUV�VHQG�VLJQDOV�WKDW�WKH\�H[SHFW�HPSOR\HHV�WR�EH�FRQVWDQWO\�FRQ-QHFWHG��FRQVWDQWO\�PRQLWRULQJ�VWUHDPV�RI�PHVVDJHV�DQG�RWKHU�LQIRUPDWLRQ��$V�D�UHVXOW��SHRSOH�FRPH�WR�IHDU�WKDW�GLVFRQQHFWLQJ��HYHQ�EULHÀ\��PD\�GDPDJH�WKHLU�FDUHHUV��QRW�WR�PHQWLRQ�WKHLU�VRFLDO�OLYHV��2UJDQL]DWLRQV�JDLQ�WKH�EHQH¿WV�RI�UDSLG�FRPPXQLFDWLRQ�DQG�VZLIW�H[FKDQJHV�RI�GDWD��%XW�ZKDW�WKH\�VDFUL¿FH�DUH�WKH�GHHSHVW�IRUPV�RI�DQDO\WLFDO�DQG�FULWLFDO�WKLQNLQJ²WKH�NLQGV�RI�WKLQNLQJ�WKDW�UHTXLUH�D�FDOP��DWWHQWLYH�PLQG��7KH�PRVW�LPSRUWDQW�ZRUN�FDQ¶W�EH�GRQH��RU�DW�OHDVW�FDQ¶W�EH�GRQH�ZHOO��LQ�D�VWDWH�RI�GLVWUDFWHG-QHVV��DQG�\HW�WKDW¶V�WKH�VWDWH�WKDW�FRPSDQLHV�WRGD\�KDYH�FRPH�WR�SURPRWH�

Is our ever-increasing reliance on technology leading to shorter attention spans and diminished creativity?

32!PERSPECTIVES ON THE LONG TERM

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LQ�RXUVHOYHV��7HFKQRORJ\�PD\�GHWHUPLQH�KRZ�ZH�ZRUN��EXW�ZH�GHWHUPLQH�KRZ�WHFKQRO-RJ\�ZRUNV��,I�ZH�DUH�WR�QDYLJDWH�WKH�DJH�RI�DXWRPDWLRQ�VXFFHVVIXOO\��ZH�QHHG�WR�FKDQJH�WKH�ZD\�ZH�GHVLJQ�RXU�VRIWZDUH�DQG�RXU�V\VWHPV��:H�QHHG�WR�ORRN�WR�FRPSXWHUV�QRW�DV�RXU�UHSODFHPHQWV�EXW�DV�RXU�DVVLVWDQWV��DV�WRROV�WKDW�KHOS�XV�GHYHORS�DQG�GHSOR\�RXU�XQLTXH�WDOHQWV²DQG�WKDW�IUHH�XV�WR�DSSO\�WKRVH�WDOHQWV�WR�WKH�PRVW�LPSRUWDQW�FKDO-OHQJHV��LQVWHDG�RI�WKH�PRVW�HSKHPHUDO��:H�QHHG��DV�ZHOO��WR�FUHDWH�WKH�RUJDQL]DWLRQDO�DQG�VRFLDO�FRQGLWLRQV�WKDW�DOORZ�SHRSOH�WR�GHYRWH�WKH�WLPH�DQG�PHQWDO�HQHUJ\�UHTXLUHG�WR�WKLQN�WKURXJK�WKRVH�FKDOOHQJHV�ZLWKRXW�LQFHVVDQW�LQWHUUXSWLRQV��,I�ZH�GRQ¶W�FKDQJH�RXU�DSSURDFK�WR�WHFKQRORJ\��ZH¶OO�HQG� XS�FUHDWLQJ�D�ZRUOG�EHWWHU�¿W�IRU�URERWV�WKDQ�IRU�SHRSOH���Q

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Software can do only what it’s told. Human beings, blessed with imagination and foresight, can do the unexpected.

CONTEXT

PERSPECTIVES ON THE LONG TERM!35

LEADING

Long-Term Visions Cut ShortNITIN NOHRIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Solving Problems That MatterPAUL POLMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Generational Thinking At CargillWHITNEY MACMILLAN AND GREG PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Long-Term Planning In a Volatile EnvironmentCHANDA KOCHHAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Business and Society In the Coming DecadesKATHLEEN MCLAUGHLIN AND DOUG MCMILLON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

36!PERSPECTIVES ON THE LONG TERM

A decade ago, I joined my Harvard Business School colleagues Bill George, Jay Lorsch, and Michael Porter, to teach in a workshop for new CEOs. Twice each year we welcome about WHQ�QHZ�FKLHI�H[HFXWLYH�RI¿FHUV�IRU�WZR�GD\V�RI�GLVFXVVLRQ�DQG�UHÀHFWLRQ��:H�EHJLQ�HDFK�workshop with the same assignment, asking each CEO to prepare and deliver the speech they hope to give as they are stepping down from the job in the future.

It’s an enlightening exercise. The average age of the group is 50, and in almost every speech, they’re looking back on a tenure that’s lasted about 10 years. In most cases, by the time of the imagined speech, the company’s revenue has doubled. So has its market capitalization. The company has become far more global. Its products and services are stronger and custom-ers happier. The company culture is more engaging. And the CEO has just chosen a fabu-lous successor who was groomed internally.

After they enumerate these accomplish-PHQWV��WKH�QHZ�&(2V�W\SLFDOO\�WKHQ�UHÀHFW�on the current problems they face. And they begin to talk about the immediate steps they are taking to address them.:KDW�WKLV�H[HUFLVH�UHYHDOV�LV�WKDW�HYHU\�&(2�

has aspirational long-term goals. They all want to make their companies better and stronger in the long term. Yet when it comes to priori-ties and plans of action, few have headlights that can shine further than two or three years. So while every CEO talks about managing for the long term, the reality is that the crush of immediate concerns and the uncertainty of the future lead them to focus on the short term.

This tension between long-term intention and short-term action is one of the great chal-lenges of modern management. These CEOs are smart and accomplished and have great integrity. They are genuinely committed to the long-term health of their company. But their actions are more often focused on the short-to-medium term.

To explain the discrepancy, many observers

Long-Term Visions Cut ShortMost business leaders want to focus on the long-term, but first they must confront the psychological forces that can foil that aspiration.

LEADING / Nitin Nohria

Nitin Nohria is the dean of Harvard Business School, where he has been a faculty member since 1988. His academic interests include the theory and practice of leadership and the study of human motivation. Nohria has cowritten or coedited 16 books, including Handbook of Leadership Theory and Practice (coedited with Rakesh Khurana). He received a BTech. from the Indian Institute of Technology and a PhD in management from the Massachusetts Institute of Technology’s Sloan School of Management.

PERSPECTIVES ON THE LONG TERM!37

tive for education, but the threat proved to EH�PXFK�PRUH�EHQLJQ��:KR�LV�WR�VD\�WKDW�WKH�current technological threat will not turn out WR�EH�HTXDOO\�RYHUK\SHG"�:KHQ�WKH�SUHYDLOLQJ�tailwinds are still carrying you forward, it is hard to know when you might confront a stall or strong headwinds. It is easier to predict the future when it has already occurred.

In contrast to the uncertainties of the long term, the certainty of the short term feels comforting. Cuts in research and develop-ment that have shown so little yield for so long, or in leadership-development programs that don’t have a clear return on investment, or in sustainability programs that don’t trans-late into immediate customer sales are tempt-ing because they can immediately improve SUR¿WDELOLW\�DQG�PD\�HYHQ�EH�DSSODXGHG�DV�a willingness to make tough calls. Even an expensive acquisition may seem a surer way to boost growth than an uncertain long-term program of organic growth into adjacent markets. To return to the example of busi-ness schools (since it is what I know best), UDWKHU�WKDQ�PDNH�D�VLJQL¿FDQW�LQYHVWPHQW�LQ�anticipation of an industry shift, such as an unproven new educational technology, it may appear more prudent to invest in the things that will more surely improve student yield LQ�WKH�VKRUW�WHUP��VXFK�DV�LQFUHDVLQJ�¿QDQFLDO�aid or better student housing./HDGHUV�FDQ�¿QG�WKH�FHUWDLQW\�RI�VKRUW�WHUP�

actions and their immediate payoffs more alluring than the uncertainty of long-term actions and their harder-to-quantify payoffs because in the end they, like the rest of us,

point to external forces, such as pressure from :DOO�6WUHHW�DQDO\VWV��LQVWLWXWLRQDO�VKDUHKROG-ers, or activist investors. It’s become almost customary for CEOs to accuse capital markets of creating undue pressure; it’s the scourge of meeting quarterly earnings expectations, they argue, that prevents them from creating long-term economic and shareholder value. Or it’s the structure of incentives for both &(2V�DQG�¿QDQFLDO�PDUNHW�SDUWLFLSDQWV�WKDW�make short-term results more alluring than long-term gains.

I believe there is an equally important—and less explored—set of internal forces that contribute to this myopia. Three forces that I consider most important are the cogni-tive asymmetry between the uncertainty of long-term actions and the certainty of short-term actions; the need to maintain ongoing credibility to continue to enjoy the license to lead; and the desire to leave a legacy with the NQRZOHGJH�WKDW�LW�LV�GLI¿FXOW�WR�GR�VR�

Let’s examine each of these three forces in turn.

LEADERS NEED CERTAINTY(Which Can Be Easier To Find In The Short-Term)%\�GH¿QLWLRQ��ORQJ�WHUP�DFWLRQV�DUH�LQKHU-ently more uncertain than short-term actions. Investments that have a long gestation period are intrinsically risky. It is hard to know when, whether, and to what extent a major invest-ment in a new drug-discovery project, a renew-able source of energy, or a new cadre of young high-potential leaders will pay off. It is equally hard to predict exactly when an industry struc-ture will be upturned or when a new technol-RJ\�ZLOO�WUXO\�EH�GLVUXSWLYH��,Q�P\�RZQ�¿HOG��many argue, for example, that the structure of higher education is bound to change and that online educational technologies will be a huge-ly disruptive force. But the same arguments were made when radio and television emerged. These, too, were seen as fundamentally disrup-

Leaders can find the certainty of short-term actions and their immediate payoffs more alluring than the uncertainty of long-term actions and their harder-to-quantify payoffs.

38!PERSPECTIVES ON THE LONG TERM

LEADERS NEED FOLLOWERS (Who May Have Shorter Time Horizons)A second important psychological mechanism leaders must confront is that their self-con-¿GHQFH�LQ�WKHLU�OHDGHUVKLS�GHSHQGV�RQ�WKH�extent to which they feel supported by the con-stituencies that must defer to their authority—and that confer upon them the legitimacy to lead. Put simply, if the employees in your orga-nization lose faith in you, it is hard to exercise leadership. It takes divine force to hold people together through many years of suffering in the desert before they reach the promised land. And, as even Moses discovered, that can be a period of profound doubt, resulting in a tenu-ous hold on the mantle of leadership.

There are compelling examples of this pres-sure, both in politics and in business. In the United States, presidents feel obliged to think DERXW�WKHLU�DJHQGD�IRU�WKH�³¿UVW�����GD\V´�RI�their administration, and to document real achievements during this window to bolster and maintain credibility—even though, unlike business leaders, they are allotted a prede-WHUPLQHG�IRXU�\HDU�WHUP�LQ�RI¿FH�LQ�ZKLFK�WR�reach their goals. One could argue that this pressure is even worse for members of the House of Representatives, who face election every two years; the conventional wisdom is that politicians in those jobs are enmeshed in D�FRQWLQXDO�FDPSDLJQ�IRU�RI¿FH��ZKLFK�LV�ZK\�LW¶V�VR�GLI¿FXOW�WR�LPSOHPHQW�OHJLVODWLRQ�WKDW�achieves long-term changes. In 1957, John F. Kennedy won a Pulitzer Prize for 3UR¿OHV�LQ�&RXUDJH, a collection of biographies of eight US senators who took actions that went against the wishes of their party and the people who elected them—acts that put the long-term con-siderations of their country above the short-term needs of their political careers. Even though the book is now more than 50 years ROG��LW¶V�WHOOLQJ�WKDW�PRVW�RI�WKH�¿JXUHV�SUR¿OHG�served during the 19th century; today, it’s hard to imagine politicians making such choices.

are simply human. Research in psychology has repeatedly shown that the majority of human beings will prefer the certainty of a smaller immediate reward over a larger future reward. Most people, for example, will choose a $100 reward that they can take home today over a $200 reward they can get a year from now, even when they understand that it would take a ridiculously high discount rate to make the $200 choice inferior.

This pattern of so-called hyperbolic dis-counting is something everyone is susceptible to. Evolutionary psychologists argue that this short-term tendency was favored by natural selection when resources were scarce, and SHRSOH�ZKR�FRXOG�¿QG�DQG�HDW�IRRG�LQ�WKH�

short term were more likely to survive than those willing to wait for the long term. It may also explain why, as a wide variety of food has become readily available and easier to prepare, human beings have tended to become more REHVH��:H�KDYH�WR�¿JKW�RXU�QDWXUDO�WHQGHQF\�WR�consume food that is tempting in the immedi-ate term. Indeed, evolution makes highly calor-ic food seem even more tasty and tempting than healthier, less caloric foods. For business, the analogy to food is not so remote. As the number of short-term options for increasing performance has increased (be it through more VRSKLVWLFDWHG�WRROV�IRU�¿QDQFLDO�HQJLQHHULQJ�or business-process reengineering), it has become more tempting for business leaders to embrace these short-term actions.

LEADING

A psychological mechanism leaders must confront is that their self-confidence depends on the extent to which they feel supported by the constituencies that must defer to their authority.

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RUJDQL]DWLRQ�´�VKH�VDLG��³,¶P�LQ�D�GLIIHUHQW�position—I feel like I need to put points on the board in the next two or three years to move DKHDG�LQ�P\�FDUHHU�´�8OWLPDWHO\��WKH�&(2�convinced the executive to take the leap, but it’s an example of how even a leader with a long-term focus can be hampered if he cannot ZLQ�WKH�FRQ¿GHQFH�RI�HPSOR\HHV��PDQ\�RI�whom believe they need to post short-term wins to advance in their careers.:KHWKHU�LWV�SROLWLFLDQV�RU�EXVLQHVV�OHDGHUV��

the license to continue to lead can depend on the support of others who may have more short-term interests and goals. The need to bring others along is another form of social and psychological pressure that can push leaders to be more oriented to the short term.

LEADERS NEED A LEGACY (But It’s Easier To Be Forgotten) The third psychological issue I see that drives CEOs to focus on short-term accomplish-ments is their desire for a legacy. Legacy is an interesting issue in management, because business suffers from a short attention span and holds limited interest for historians. In SROLWLFV��D�OHDGHU�ZKR�OHDYHV�RI¿FH�FDQ�WDNH�solace in the fact that the long-term assess-ment of his or her accomplishments will be

Compare these roles with the pressures fac-LQJ�WZR�YHU\�GLIIHUHQW�EXVLQHVV�OHDGHUV��:KHQ�the Apple executive Ron Johnson was tapped to run J.C. Penney, he created an ambi-tious, long-term plan to dramatically revamp its pricing strategy and store layouts. It’s impossible to know if the strategy would have worked because the short-term results were so dismal that Johnson lost credibility, not only with investors and directors but also with many of his employees inside the company, which resulted in his resignation. Contrast his experience with that of Jeff Bezos, who has had a remarkably successful run at Amazon, during which the company continually shows meager quarterly earnings because of large reinvestment into new lines of business, such as cloud services, streaming video, and smartphones. Unlike Johnson, Bezos has HDUQHG�WKH�FRQ¿GHQFH�RI�HPSOR\HHV��DQG�many investors) based on his 20-year track record and his status as Amazon’s founder. But his example begs the question: Could a nonfounder who entered Amazon in 2015 LQVSLUH�HQRXJK�FRQ¿GHQFH�WKDW�FRQVWLWXHQWV�would allow him or her to make such bold, long-term bets? Or, like Ron Johnson at J.C. Penney, would the inevitable decline in short-term results chip away at his credibility and others’ willingness to follow him?

Sometimes the pressure to rack up short-term gains comes from the leaders’ own followers. I recently spoke with an executive at a company whose CEO had asked her to leave a highly visible role leading the core business of the company to help launch a risky new business. In this case, the CEO KDG�JDLQHG�HQRXJK�FUHGLELOLW\�RYHU�WKH�¿UVW�few years of his tenure to allow him to stop worrying excessively about the new venture’s short-term results. As he tried to cajole the executive into moving from the main business to running the start-up division, she balked. “I know you’re thinking long term, but if this doesn’t work out you still get to run the entire

In the classroom of the future, more lectures may be delivered online, like the one this professor is preparing. Leaders for the long term must resist the tendency to ignore such potential disruptors.

40!PERSPECTIVES ON THE LONG TERM

to want to have done something that’s already established their legacy—otherwise, they are unlikely to get any credit for it.

These internal, psychological forces that drive CEOs to favor the short term over the long term have at least one similarity with the external, capital-market forces that are usually described as the primary driver of short-termism: they’re a set of forces that are H[WUHPHO\�GLI¿FXOW�WR�FRXQWHUDFW��%XW�WKH\�DUH�worth keeping in mind as we diagnose the causes of the growing managerial myopia. 0DQDJHULDO�WLPH�KRUL]RQV�DUH�FHUWDLQO\�LQÀX-enced by incentives and compensation, by the loud criticism of activists, and by the real pain (or anticipated pain) that occurs when a com-pany misses earnings and its stock slides. But there are quieter, less celebrated, more psycho-logical forces at work here as well—and trying to better understand them can be a useful step in trying to design smart counterweights.

FIRST STEPS FOR LONG-TERM LEADERSHIPI’m afraid I’m going to be long on diagnos-ing the problem and short on recommend-ing a solution. But let me offer two parting thoughts that I hope will stimulate further thinking about counterweights to the forces that lead to short-term behavior. Neither of these thoughts is original; they are both bor-rowed from people I admire for their wisdom and long-term perspective.7KH�¿UVW�LV�IURP�-LP�&KDPS\��DXWKRU�RI�

5HHQJLQHHULQJ�WKH�&RUSRUDWLRQ�and a wonder-ful adviser to many business leaders. He makes the distinction between thinking left to right (which most business leaders do) and think-ing right to left (which he argues can be more SURGXFWLYH���:KDW�WKH�GLVWLQFWLRQ�PHDQV�LV�WKDW�even though most leaders have an end goal in mind, they start by focusing on immediate issues and then think about how to get from here to there (left to right). Jim recommends instead that leaders think more carefully about

UH¿QHG�RYHU�GHFDGHV��RU�HYHQ�FHQWXULHV���DQG�that leaders who are held in low regard when WKH\�OHDYH�RI¿FH�FDQ�VRPHWLPHV�VHH�WKHLU�reputations burnished over long periods of historical reevaluation. In the United States, +DUU\�6��7UXPDQ�DQG�*HRUJH�+�:��%XVK�DUH�two leaders who’ve experienced this.

In business, this reexamination of legacy rarely happens. Convention, corporate-governance rules, and best practice compel leaders to completely exit the stage when WKH\�OHDYH�RI¿FH��LW¶V�EHFRPH�XQFRPPRQ�for outgoing CEOs to retain a board seat, for instance). Once they do, they are quickly IRUJRWWHQ��:KLOH�ZULWHUV�GR�FRPSLOH�KLVWR-ries of a few iconic business leaders (such as :DOWHU�,VDDFVRQ¶V�ELRJUDSK\�RI�6WHYH�-REV���this is unusual. Stop and think for a moment how many CEOs you can recall from the 1970s or 1980s. Last year I had planned to refer to Lee Iacocca in my commencement address to graduating students, but someone who read a draft of my remarks warned me that today, more than 20 years after Iacocca’s retirement, many MBA students may have no idea who Iacocca is. In business, unlike in political or national histories, even monumental achieve-ments can be quickly forgotten.$JDLQVW�WKLV�EDFNGURS�RI�WKH�GLI¿FXOW\�RI�

leaving a lasting legacy, it’s only natural for business leaders to want to manage in a way that allows them to enjoy the fruits of their efforts during their time in the job—and to make decisions that make the company suc-cessful now, while they’re leading it, instead of tomorrow, when hardly anyone remembers that they ever led it. By the time CEOs deliver their retirement speeches, it’s natural for them

LEADING

In business, unlike in political or national histories, even monumental achievements can be quickly forgotten.

PERSPECTIVES ON THE LONG TERM!41

5HYLHZ��:KHQ�DVNHG�DERXW�RWKHU�&(2V�KH�admires, he offered a list of people he charac-terized using a nautical metaphor: that they are ³GHHS�NHHOHG�´�%\�WKDW��KH�PHDQW�OHDGHUV�ZKR�have a strong inner directedness that allows them to stay sure and steady, even as they are buffeted by daily external events. I think deep-keeled people are akin to those who have been described as having a clear moral compass, which helps them, as Bill George puts it, to stay focused on true north. It is certainly easier to stay focused on the long term if you have a deep sense of purpose and an abiding set of deeply held values. Leaders with a deep keel can help those in the boat not get too caught up in the storm; they can ensure that the crew stays focused on sailing to a safe destination. Rather than let other people’s anxieties take over, they calm those around them through

their own self-assurance. They are less worried about legacy and how others will remember them because they act from a sense of calling and how they will remember themselves.

Getting business leaders to focus more on the long term will undoubtedly create a healthier and more robust economic system. ,W�ZLOO�UHTXLUH�VLJQL¿FDQW�DWWHQWLRQ�WR�DQG�changes in the external system in which busi-ness leaders operate. But it will also require a deeper understanding of the internal pressures they face and how those might be attenuated. It will require both leaders and their constituents to develop their own deep NHHOV��VR�WKH\�FDQ�GH¿QH�LPSRUWDQW�ORQJ�WHUP�goals and stay the course to achieving them. Q

what would have to be true to accomplish their long-terms goals, and then think backward about what they need to begin doing today to realize this goal (right to left). For example, one way to try to double revenues in ten years would be to focus on the current business and determine how to grow it aggressively (left to right). Another way is to recognize that achiev-ing this goal will require the company to build a new or adjacent business about half the size of the current business (because the existing business simply does not have enough head-room to double, even if it grows faster than the competition). This realization, which comes from disciplined right-to-left thinking, gives a leader the insight to focus not just on growing the existing business today but also on invest-ing in building a new one.

To bring this idea home to our situation in business education, when I became dean, my initial focus was primarily on strengthen-ing our 100-year-old MBA program. I didn’t pay much attention to online education, even though I was asked about this potential threat many times. But after listening to a talk by Anant Agarwal, founder of edX, I remembered -LP�&KDPS\¶V�DGYLFH�DQG�DVNHG�P\VHOI��:KDW¶V�\RXU�EHVW�JXHVV�RI�KRZ�VLJQL¿FDQW�RQOLQH�education will be in higher education ten years from now? My conclusion was that although ,�ZDV�FRQ¿GHQW�WKDW�LQWHQVH��LPPHUVLYH��LQ�residence programs like our MBA program would still be around, online education would be at least 25 percent—or perhaps much more—of the higher-education landscape. By thinking right to left, it became obvious to me that I could not ignore the promise and peril of online education—that it represented an opportunity to carve out a leadership position and avoid a potential threat. Thinking right to left is no guarantee of long-term success, but I think it at least increases the odds of taking successful long-term actions.

The second idea comes from an interview with Jeff Bezos in the +DUYDUG�%XVLQHVV�

It is certainly easier to stay focused on the long term if you have a deep sense of purpose and an abiding set of deeply held values.

Paul Polman is chief executive of Unilever. He also serves as chairman of the World Business Council for Sustainable Development, is on the board of the United Nations Global Compact, and is a member of the International Business Council of the World Economic Forum. He was a member of the UN High-Level Panel of Eminent Persons on the Post-2015 Development Agenda. Polman earned a BBA/BA from the University of Groningen, Netherlands, and an MA in economics and an MBA from the University of Cincinnati.

42!PERSPECTIVES ON THE LONG TERM

Winston Churchill once famously observed that democracy was the worst form of govern-ment—apart from all the others that had been tried. If he were alive today, he might say the same about capitalism as an economic system. For all its failings, no other system KDV�DSSURDFKHG�LWV�HI¿FLHQF\�LQ�EULQJLQJ�unprecedented growth and prosperity to bil-lions of people. Capitalism is the best we have at marrying solutions with needs, funneling capital to worthy ideas, and matching people with necessary work.%XW�WKH�³EHVW�ZH�KDYH´�LV�QR�ORQJHU�JRRG�

enough, as capitalism is also failing us on PDQ\�OHYHOV��7KH�V\VWHP�KDV�GHHS�ÀDZV��both in theory and in outcomes. Perhaps the core failing is an inability to deal with what economists call externalities—those impacts, sometimes positive, but also dra-matically negative, that fall outside the mar-ketplace. Pollution is the classic externality, but that’s only one example of a general disregard for the critical assets the planet provides to society and economies (mostly free of charge).

The failings of our current system also include a range of other ills: a consistent bias against the future through the use of dis-FRXQW�UDWHV�WKDW�PDNH�IXWXUH�EHQH¿WV�ZRUWK-less and a general obsession with short-term performance; an inability to put numbers on things that are clearly valuable to society and business, such as people’s skills and knowl-edge; and a focus on maximizing growth above all else.7KH�RXWFRPHV�RI�WKHVH�VWUXFWXUDO�GH¿FLWV�

are predictable. On the environmental side, growth has come at an enormous cost, and as a result, we’re now pushing the limits of ZKDW�RXU�SODQHW�FDQ�VXVWDLQ��:H¶UH�GHSOHWLQJ�our inventory of critical natural resources, from a stable climate and abundant clean DLU�DQG�ZDWHU�WR�ULFK�VWRFNV�RI�IRRG��¿EHU��and minerals. These things are not “nice to KDYHV´�RU�OX[XULHV�EXW�FULWLFDO�DVVHWV�IRU�D�

Solving Problems That MatterIt’s only by doing business with purpose that we can rediscover the real purpose of business.

LEADING / Paul Polman

PERSPECTIVES ON THE LONG TERM!43

RESTORING TRUST IN BUSINESS THROUGH PURPOSEBusiness, and the capitalist system it is part of, is in most regards amoral, at least as cur-rently practiced. Capitalism will optimize many outcomes but will generally do so UHJDUGOHVV�RI�WKH�ODUJHU�LPSOLFDWLRQV��:H�FDQ�use the tools of capitalism to maximize pro-duction of cigarettes or nuclear weapons as well (or as poorly) as we can produce apples or affordable healthcare. In a perverse way, there is a kind of trust that stems from being predictable: citizens can count on business doing whatever it can to maximize short-term earnings at the expense of greater well-being and even a company’s own longer-term interests.

Rebuilding trust will require business to change in both principle and deed. Our core operating values must include new com-mitments to the larger world, such as the following:Q A sense of larger purpose. :H�PXVW�bring to bear all aspects of ourselves and our organizations, combining the powerful busi-QHVV�WRROV�RI�WKH�³KHDG�´�VXFK�DV�DQDO\VLV��VWUXFWXUH��DQG�HI¿FLHQW�PDQDJHPHQW�RI�FDSL-WDO�RI�DOO�IRUPV��ZLWK�WKH�³KHDUW�´�LQFOXGLQJ�the passion and creativity that business uses to solve problems and inspire people. Q Transparency. :H�PXVW�EH�WUDQVSDUHQW�about all aspects of the way we do busi-ness—everything from adherence to the UN Guiding Principles on Business and Human Rights to what goes into our products to the way in which we contribute more broadly to operating in a responsible and sustainable

WKULYLQJ�VRFLHW\�DQG�HFRQRP\��:H¶UH�DW�WKH�precipice—or already over it—of what the latest science warns will be “severe, perva-sive, and irreversible impacts for people and HFRV\VWHPV�´1

As the world heads toward what may be as many as 12 billion people by the end of the century, all aspiring to a higher standard of living, something profound needs to change in how we live, eat, get around, and do busi-ness.2 This has become the core question of our times: How can we provide prosperity to billions more people without undermining the ability of the planet to support us?

Business, run in new ways, will be a criti-cal part of the answer.

To change how and why business operates, our leaders need to make a fundamental shift in both strategy and tactics.3 This new form of responsible capitalism must go well EH\RQG�WUDGLWLRQDO�GH¿QLWLRQV�RI�FRUSRUDWH�social responsibility or sustainability. Busi-nesses must shift their focus from satisfac-tion with a simple license to operate to creating a OLFHQVH�WR�OHDG.:H�QHHG�WR�FKDQJH�RXU�IRFXV�WR�UHDO��ORQJ�

term value creation, not just quarterly earn-ings. This new vision will allow business to serve the needs of citizens and communities with the same vigor with which it has served the needs of shareholders over many years. And it will allow business to see itself as a part of society, not separate from it.:LWK�WKH�ULJKW�OHQV��ZH�FDQ�VHH�FOHDUO\�WKDW�

it has always been absurd to treat environ-mental and social issues as a subset of the business agenda. It’s obviously the other way around: business is a part of society and one of its most important expressions. There is QR�FRQÀLFW�EHWZHHQ�VHUYLQJ�VKDUHKROGHUV�and serving citizens. Shareholders are part of society too.

But as we take into account all of society’s needs, we face a big challenge. Our collective hurdle: a lack of trust.

This has become the core question of our times: How can we provide prosperity to billions more people without undermining the ability of the planet to support us?

44!PERSPECTIVES ON THE LONG TERM

LEADING

conscious choice to, in the words of the poet Robert Frost, take the road “less traveled E\�´�:H�FDQ�FKRRVH�WR�EH�JLYHUV�DQG�QRW�WDN-ers from the system that gives us life in the ¿UVW�SODFH��8QLOHYHU�KDV�E\�QR�PHDQV�¿JXUHG�RXW�DOO�

the answers, but the company has chosen a OHVV�WUDYHOHG�SDWK��:H�FDOO�WKLV�WKH�8QLOHYHU�Sustainable Living Plan (USLP).

UNILEVER’S APPROACH AND BUSINESS BENEFITS:H�KDYH�VHW�D�FOHDU�DQG�DXGDFLRXV�JRDO�WR�double the size of the company while reduc-ing our environmental footprint and increas-ing our positive social impact. This effort requires a total value-chain approach, from sustainable sourcing to sustainable living. It has never been tried before by a company of our scale.

The USLP was founded with three big objectives in mind. By 2020, we want to help more than a billion people take action to improve their health and well-being, halve the environmental footprint that results from making and using our products, and enhance the livelihoods of millions of people across our supply chain.

Underpinning these goals are more than ���VSHFL¿F��WLPH�ERXQG�WDUJHWV�4 And we are PDNLQJ�UHDO�SURJUHVV��:H¶YH�DGGHG�DURXQG�€10 billion to our revenues, growth that is directly supported by the USLP. The brands that we’ve invested with a sense of purpose and tied to larger challenges in society have been growing, in some cases, at twice the average rate of the rest of our portfolio. :H¶YH�DOVR�ORZHUHG�FRVWV�E\�PRUH�WKDQ�

€300 million through a range of initiatives, including cutting resource use and moving all factories to zero nonhazardous waste to ODQG¿OO��$QG�ZH¶UH�UHGXFLQJ�WKH�ULVNV�IURP�extreme weather and climate change by shifting to more renewable energy, including a commitment in the United States to reach

way. This kind of openness will go a long way in helping to restore trust.Q A longer-term perspective.�:H�PXVW�KDYH�D�SHUVSHFWLYH�WKDW�GRHV�QRW�VDFUL¿FH�the greater good on the altar of short-term SUR¿W��,Q�D�ZRUOG�ZKHUH�WKH�PDMRULW\�RI�VWRFN�shares are bought and sold in milliseconds, and with relentless pressure on public com-panies to perform on a quarterly basis, this last principle is particularly challenging.

To bring these core principles to life, I sug-gest that companies focus on a few areas:

First, business leaders should set bold goals based on science, such as the dire need for the world to control carbon emis-sions very quickly. Progress toward those goals should be measured against external thresholds, benchmarks, and realities. Such metrics, openly tracked to build accountabil-ity, promote a deeper understanding of and

ability to manage our impact up and down the value chain.

Achieving these goals will often call for effective partnerships, even radical col-laborations across traditional lines. Our problems have become enormously complex, and neither governments nor business nor nongovernmental organizations have shown WKH�DELOLW\�WR�WDFNOH�WKHP�DORQH��:H�PXVW�work together to create solutions.

These principles and tactics create more transparency and trust in a company’s actions. They represent a better path but also D�FOHDU�FKRLFH��:H�FDQ�EXU\�RXU�KHDGV�LQ�WKH�sand, hoping that the storms of rising public indignation will pass. Or we can make a

We must have a perspective that does not sacrifice the greater good on the altar of short-term profit.

PERSPECTIVES ON THE LONG TERM!45

networking site LinkedIn, behind only the technology giants Google and Apple. Not bad IRU�D�³VRXSV�DQG�VRDS´�FRPSDQ\�WKDW�GDWHV�back 130 years. People come to us and stay with us in large part because of our purpose, and they demand that we live up to our goals.

UNILEVER’S PROGRAMS AND BRANDS$OO�WKHVH�EXVLQHVV�EHQH¿WV�VWHP�IURP�D�FRQ-certed effort across the company to bring the principles of responsible capitalism to every SDUW�RI�WKH�EXVLQHVV��:H�KDYH�KDG�VLJQL¿-cant success both building our business and helping solve larger global challenges. The work we did with our Lifebuoy soap brand provides a good example of how this com-mitment plays out.

It is morally repugnant that millions of FKLOGUHQ�GLH�EHIRUH�WKHLU�¿IWK�ELUWKGD\��including two million from easily prevent-able diseases and ailments like diarrhea. That’s the equivalent of a jumbo jet of chil-dren crashing every hour, every day.

The most basic of health practices, hand ZDVKLQJ��FDQ�VLJQL¿FDQWO\�UHGXFH�WKH�QXP-ber of deaths. Lifebuoy soap, one of Unile-ver’s oldest and proudest brands, has made awareness and practice of hand washing a PLVVLRQ��:H�HPSOR\�WKH�RQO\�NQRZQ�3K'�LQ�the world with a specialty in public health and hand washing.

Our programs have already reached mil-lions of people across Latin America, Africa, and Asia. Just a single event, Global Hand :DVKLQJ�'D\��WRXFKHV�����PLOOLRQ�SHRSOH�LQ�100 countries. These efforts are working—in

100 percent renewable power by 2020, fol-lowing the lead of our European operations, which have already hit this mark.:H¶UH�PDNLQJ�RXU�VXSSO\�FKDLQV�PRUH�

resilient and stable by working with small-holder farmers to improve farming practices DQG�OLYHOLKRRGV��:H�KDYH�DOUHDG\�KHOSHG�or trained more than 570,000 additional smallholders, from tea farmers in Turkey to vanilla farmers in Madagascar.

Commercial agriculture drove more than 70 percent of tropical deforestation in the period 2000-2012, contributing to ecosys-tem service loss and climate change. So we’re tackling the contribution that the commod-ity supply chains we rely on make to defor-estation. Our commitment to 100 percent VXVWDLQDEOH�VRXUFLQJ�KDV�JDOYDQL]HG�VLJQL¿-cant change in our sourcing and purchasing patterns.

However, the wholesale transformation of supply chains towards more sustainable models is needed. As the purchaser of 3 percent and 1 percent of the world’s palm oil and soy respectively, we are committed to playing a major part in this transformation, working in partnership with our industry peers, governments, civil society and the people who live and work in the world’s for-ests. This change is gathering momentum. At the UN Secretary General’s Climate Change Summit in September 2014, more than 170 entities, including businesses, governments, states, provinces, NGOs and indigenous leaders committed to halving deforestation by 2020, ending it by 2030 and restoring 350 million hectares of degraded forest.

The USLP is also helping us to motivate and attract the best talent. Employees are highly engaged by our efforts to make sustainable living commonplace as they look increasingly for meaning at work in a WXUEXOHQW�ZRUOG��:H�DUH�QRZ��IRU�WKH�VHFRQG�\HDU�UXQQLQJ��WKH�WKLUG�PRVW�³LQ�GHPDQG´�employer among jobseekers on the global

Real transformational change is only possible with new and innovative partnerships. We have to act together to address challenges as large and complex as climate change, inequity, or poverty.

46!PERSPECTIVES ON THE LONG TERM

LEADING

the way business and the world work; the largest 200 public companies alone have revenues of more than $20 trillion, or 29 percent of the world’s economic output.

As one of these CEOs, I’ve had the oppor-tunity and privilege to bring the leverage and reach of Unilever to bear on a number of important initiatives. These programs are opportunities to help shape the policy environment.

Many in business seem to have lost track of ZK\�FRPSDQLHV�H[LVW�LQ�WKH�¿UVW�SODFH��$W�its most basic level, a company is meant to solve a problem for a customer. But taking that beyond face value requires putting a moral, purpose-driven center at the heart RI�WKDW�TXHVW��$�FRPSDQ\�VKRXOG�QRW�¿OO�MXVW�DQ\�QHHG��LW�VKRXOG�¿OO�WKH�RQHV�ZRUWK�¿OOLQJ�and the ones most needed. It should solve the problems that already exist, not create new ones. &RQWUDU\�WR�ZKDW�VRPH�LQ�WKH�¿QDQFLDO�

markets would have us believe, putting a larger purpose at the core of doing business is not at odds with corporate structures or legal requirements. Fair returns to sharehold-HUV�DUH�PRUH�WKDQ�¿QH��WKH\¶UH�GHVLUHG��7KH�companies with the most resources can do the most good. But those returns are an outcome, not a goal. There is more to business than just SUR¿W�PD[LPL]DWLRQ��EXW�WKH�SDWK�RI�UHVSRQ-VLEOH�EXVLQHVV�LV�D�SUR¿WDEOH�RQH�

Purpose-driven business creates private value for companies, but it creates much more value for a combination of itself DQG society. Business does not stand apart from social or environmental challenges but is an integral part of the fabric of society.

In this volatile and transparent world, the organizations that work to solve the greatest challenges in partnership with their peers, communities, employees, and customers will thrive. Responsible organizations will out-compete their more self-centered and short-

one of the poorest areas of India, Thesgora, the incidence of diarrhea among children fell from 36 percent to just 5 percent.5

The work has also been remarkable in driving the success of the Lifebuoy brand and business. Lifebuoy created a beautiful video featuring an Indian boy surviving to

DJH�¿YH�WKDW�KDV�UHDFKHG�WHQV�RI�PLOOLRQV�RI�viewers on YouTube. The Facebook page for Lifebuoy has more than four million likes—for hand soap! And this 120-year-old product is now one of the company’s fastest-growing brands.

NEW ROLES AND NEW WAYS OF WORKING7KHUH�LV�JRRG�EXVLQHVV�LQ�DOO�RI�WKLV��:LWK-out enough water, energy, or hygiene, the communities we operate in cannot function. Business cannot thrive unless the planet and VRFLHW\�WKULYH�DV�ZHOO��:KLOH�WKHUH�LV�D�ORW�we can do—and are doing—the challenges are too big for any one organization to solve alone. Real transformational change is only possible with new and innovative partner-VKLSV��:H�KDYH�WR�DFW�WRJHWKHU�WR�DGGUHVV�challenges as large and complex as climate change, inequity, or poverty.

The relatively small pool of multina-tional CEOs and corporate leaders provides an unusual opportunity to promote deep change. These roles come with serious UHVSRQVLELOLW\��:H�KDYH�OHYHUDJH�WR�FKDQJH�

Contrary to what some in the financial markets would have us believe, putting a larger purpose at the core of doing business is not at odds with corporate structures or legal requirements.

PERSPECTIVES ON THE LONG TERM!47

Those companies that fail to see that business has a much larger social purpose and value than making money will struggle to survive. Society will reject them. But in the proper hands, the purpose of business FDQ�PRYH�EH\RQG�MXVW�SULYDWH�¿QDQFLDO�JDLQ��:H�FDQ�EH�D�UHDO�IRUFH�IRU�JRRG��KHOSLQJ�WKH�world and its peoples prosper in every way possible. Q

term-focused peers, addressing increasingly FRPSOH[�FKDOOHQJHV�IRU�DOO²LQ�HVVHQFH��¿QG-LQJ�WKH�XOWLPDWH�SXUSRVH�RI�EXVLQHVV��¿OOLQJ�D�QHHG�DQG�SUR¿WLQJ�IURP�GRLQJ�VR�:H�DUH�LQ�WKH�PRVW�LPSRUWDQW�WLPH�LQ�

human history, an era in which we will discover if we’re able to come together to manage our shared challenges and build a prosperous world. The )LQDQFLDO�7LPHV summed up well the plight we face when it argued in a recent column: “A globalization that enriches the richest and impoverishes the rest is not sustainable. The case for RSHQ��LQFOXVLYH�VRFLHWLHV�KDV�WR�EH�UHPDGH�´6 Business can and must take the lead in these efforts, but corporate leaders need to view their role differently. They have to remake the case for open, inclusive societies.

We are in the most important time in human history, an era in which we will discover if we’re able to come together to manage our shared challenges and build a prosperous world.

1 &OLPDWH�&KDQJH�������0LWLJDWLRQ�RI�&OLPDWH�&KDQJH, Intergovernmental Panel on Climate Change and Cambridge University Press, 2014, ipcc.ch.2�5REHUW�.XQ]LJ��³$�ZRUOG�ZLWK����ELOOLRQ�SHRSOH"�1HZ�SRSXODWLRQ�SURMHFWLRQV�VKDWWHU�HDUOLHU�HVWLPDWHV�´�1DWLRQDO�*HRJUDSKLF, September 18, 2014, nationalgeographic.com.3�:H�ORRN�WR�PDQ\�KHOSIXO�PRGHOV�RI�D�QHZ�SDWK��LQFOXGLQJ�RQH�RXWOLQHG�E\�8QLOHYHU�DGYLVHU�$QGUHZ�:LQVWRQ�LQ�KLV�ERRN�7KH�%LJ�3LYRW��5DGLFDOO\�3UDFWLFDO�6WUDWHJLHV�IRU�D�+RWWHU��6FDUFHU��DQG�0RUH�2SHQ�:RUOG, Boston, Massachusetts: Harvard Business Review Press, 2014. 4 According to analysis by pivotgoals.com, Unilever has 20 goals that are consistent with science and aggressive enough to meet the environmental and social requirements of sustainability. Of the world’s largest companies, the next-closest organization has 10 such goals, and most have none. 5 Hindustan Unilever claim based on research conducted by The Nielsen Company in September 2013: 1,485 households with children aged EHORZ����\HDUV��DFURVV����YLOODJHV��VL[�WHVW�JURXSV�DQG�¿YH�FRQWURO�JURXSV��6�3KLOLS�6WHSKHQV��³6FRWODQG�LQGHSHQGHQFH�YRWH�H[SRVHV�WKH�HVWDEOLVKHG�RUGHU�´�)LQDQFLDO�7LPHV, September 18, 2014, ft.com.

48!PERSPECTIVES ON THE LONG TERM

Generational Thinking at CargillAt this family-owned company, long-term planning means looking ahead 30 years or more.

Taking the long-term view has always been the Cargill way. In 1939, Cargill set out to ¿QG�D�PRUH�HI¿FLHQW�ZD\�WR�VKLS�JUDLQ�DORQJ�the Great Lakes and the Erie Canal. Cargill leaders believed they could create a bigger and more stable vessel by lashing barge and WRZERDW�WRJHWKHU�ZLWK�VWHHO�FDEOHV��2Q�LWV�¿UVW�voyage, the newfangled barge sank. Still con-vinced by their basic premise, they tweaked the design, eventually creating the Carneida barge, which was considerably cheaper to operate and made the canal more easily navigable. Thanks to the willingness of those leaders to take risks for the long term, Cargill was able to lower costs and gain a competi-tive advantage. The Carneida also gave Cargill HQWU\�LQWR�WKH�VKLSSLQJ�EXVLQHVV��IXO¿OOLQJ�WKH�vision of Cargill’s second CEO, John MacMil-lan Jr., of managing the movement of grain in DQ�³HQGOHVV�EHOW´�IURP�IDUP�WR�¿QDO�EX\HU�

That story is an excellent illustration of the willingness Cargill has always had to set ambitious goals and stick with them, even through setbacks and tough times, recogniz-ing that a prosperous future requires bold investment in the present. In recent years, many business articles have been written about privately held companies and their per-ceived advantages, from unique culture and values to a freedom from quarterly earnings

LEADING / Whitney MacMillan and Greg Page

Whitney MacMillan was CEO and chairman of the board of directors of Cargill from 1976 to 1995. Greg Page served as Cargill’s CEO from 2007 to 2013 and is currently executive chairman of its board. He also serves on the boards of Eaton, Carlson, and Deere & Company.

PERSPECTIVES ON THE LONG TERM!49

be more agile and adaptable to change is the primary ingredient for any organization to JURZ�SUR¿WDEO\��

So what has shaped Cargill’s long-term view, and what have been some outcomes?

INVESTING FOR THE LONG TERM Cargill, for one, has always invested with the long term in mind. In particular, it has invested in systems and networks that can LPSURYH�RSHUDWLRQV��HYHQ�DPLG�VLJQL¿FDQW�year-to-year volatility. A broad understanding of our supply chains and of businesses associ-ated with the delivery of food has led us to invest in ocean transportation and energy, for H[DPSOH��DV�ZHOO�DV�¿QDQFLDO�DQG�ULVN�PDQ-agement businesses to better serve customers and manage our own risks. :H¶YH�DOVR�DJJUHVVLYHO\�SXUVXHG�JHRJUDSKLF�

diversity over the past 40 years. The reality is that having broad supply chains—despite some short-term meteorological and political chal-lenges—has enabled longer-term stability. The ability to source grain and oilseeds from other parts of the world when the American Midwest faces drought helps to smooth the impact the company might feel if it were totally dependent RQ�D�PRUH�FRQ¿QHG�JHRJUDSKLF�IRRWSULQW�

Something like 85 percent of all food consumed is consumed in the country where it is grown—and Cargill is a big player in the other 15 percent of the market, in which food is moved from places of surplus to places of shortage. But to grow as it has, the company has had to expand beyond its base in North $PHULFD�DQG�:HVWHUQ�(XURSH��&DUJLOO�KDV�

targets. A 2008 McKinsey survey of UK direc-tors cited greater engagement of directors on private-company boards.1 )RUEHV noted that LWV�URVWHU�RI�$PHULFD¶V�ELJJHVW�SULYDWH�¿UPV�outperformed the S&P 500 in 2012.2 And the 2014 Edelman Trust Barometer shows that consumers throughout the world trust pri-vately held companies slightly more than pub-licly traded ones, and they trust family-owned companies even more. There is no doubt that &DUJLOO�KDV�EHQH¿WHG�IURP�WKRVH�DGYDQWDJHV�

The purpose here is QRW�WR�SURYLGH�VSHFL¿F�opinions about organizational structure, or even to suggest that private, family-owned companies such as Cargill are preferable to RWKHU�IRUPV��:KLOH�ZH�OLNH�KRZ�RXU�IDPLO\�ownership model has evolved, we know that business strategy and leadership are fun-damentally about making good choices and that such choices could be made within any organizational structure. Our goal is to show how the kind of long-term thinking that led to breakthrough innovations like the Carneida barge continue to guide Cargill and contribute to its success.:H�NQRZ�IURP�RXU�H[SHULHQFH�UXQQLQJ�

Cargill and serving on boards of public com-panies that the allocation of time is very dif-ferent at a family-owned company. As CEOs, we did not have to interact with stock analysts RQ�:DOO�6WUHHW�RU�VRPHWLPHV�FRQWHQWLRXV�shareholder groups. Nor did we have to con-cern ourselves with stock-price movements LQ�WKH�PDUNHW�RU�WKH�GHWDLOHG�¿OLQJV�ZLWK�WKH�Securities and Exchange Commission that are required of public companies (though WKHUH�DUH�VWLOO�PDQ\�¿OLQJV�UHTXLUHG�IRU�SULYDWH�companies of our size). That’s not to say there is always unanimity in a family-owned com-pany; it is just to underscore that the amount of time spent with family owners as opposed to public shareholders is different.

In and of itself, long-termism is not a pana-cea. Let’s face it: deploying talent and assets in smart ways that allow an organization to

The allocation of time is very different at a family-owned company. As CEOs, we did not have to interact with stock analysts or sometimes-contentious shareholder groups.

50!PERSPECTIVES ON THE LONG TERM

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customers and help them thrive in markets with potential. As a result of our global mind-set, we have often been better poised to make investments for the future when politics shift. After the passage of the North American Free Trade Agreement, for example, we were able to quickly invest in a new soy oilseed-process-LQJ�SODQW�DQG�UH¿QHU\�QHDU�7XOD��0H[LFR��7KLV�facility uses both imported and local inputs for domestic distribution and export and KDV�DOORZHG�&DUJLOO�WR�SUR¿WDEO\�H[SDQG�LWV�market share in Mexico.

CULTURE AND CORE VALUESOne feature of many long-standing and successful family-owned and privately held companies is their strong core values, often articulated early in their development. Bechtel and Mars, for example, are both guided by principles that were laid down by early family members. Cargill is no different. Our second leader, John H. MacMillan, once VDLG��³2XU�ZRUG�LV�������RXU�ERQG�´�)DFHG�ZLWK�D�PDMRU�¿QDQFLDO�FKDOOHQJH�XSRQ�WKH�GHDWK�of his father-in-law and company founder :LOOLDP�:DOODFH�&DUJLOO�LQ�������0DF0LOODQ��convinced bankers to give him time to settle the company’s debts and sell off assets. In less than seven years, he not only made good on his promise but also built a growing grain business that set the stage for the company we know as Cargill today.

Cargill has formulated seven guiding principles under which all company policies ¿W��7KHVH�SULQFLSOHV��ZKLFK�IROORZ��VHUYH�DV�D�guide not to ZKDW we do but to KRZ we do it:

1.� :H�REH\�WKH�ODZ� 2.�:H�FRQGXFW�RXU�EXVLQHVV�ZLWK�LQWHJULW\� 3.�:H�NHHS�DFFXUDWH�DQG�KRQHVW�UHFRUGV� 4. :H�KRQRU�RXU�REOLJDWLRQV� 5.��:H�WUHDW�SHRSOH�ZLWK�GLJQLW\�DQG�UHVSHFW� 6.��:H�SURWHFW�&DUJLOO¶V�LQIRUPDWLRQ��DVVHWV��

and interests. 7.� �:H�DUH�FRPPLWWHG�WR�EHLQJ�D�UHVSRQVLEOH�

global citizen.

been served well by early investments in Asia, Eastern Europe, and South America.

Investing globally has sometimes required us to navigate geopolitical unrest and to be somewhat patient as emerging markets GHYHORSHG��$IWHU�WKH�IDOO�RI�WKH�%HUOLQ�:DOO��the number of free-market economies in the ZRUOG�LQFUHDVHG�VLJQL¿FDQWO\��)RU�&DUJLOO��that meant access to a lot more people with demand for more and better food. Because of earlier investments in the region, we were well positioned to serve those new markets. Our cottonseed operations in East Africa and our cocoa operations in Côte d’Ivoire and Ghana have at times been challenged by civil unrest and other complications. But persis-tence has allowed us to remain among the largest suppliers of high-quality cocoa beans to some of the world’s top chocolatiers.+\SHULQÀDWLRQ�DQG�SROLWLFDO�FKDOOHQJHV�

through the years in places like Argentina and Venezuela prompted us to think about how we might remain a reliable supplier to our major

LEADING

The Carneida barge, based on a new design, created long-term value by making it easier to ship grain through the Erie Canal.

PERSPECTIVES ON THE LONG TERM!51

many other customers and businesses and has grown in size and purpose.

In the last few years, we have made a sig-QL¿FDQW�LQYHVWPHQW�LQ�SRXOWU\�RSHUDWLRQV�MXVW�outside Chuzhou in Anhui province in China to serve the growth needs of American-based food-service retailers in China and have built a state-of-the-art integrated chicken-processing facility with the capacity to process nearly 65 PLOOLRQ�ELUGV�D�\HDU��:KLOH�WKLV�SODQW�KDV�\HW�WR�recover its steep investment, it too is growing alongside customers who know the special care Cargill has taken working with Chinese IRRG�KHDOWK�DQG�VDIHW\�RI¿FLDOV�WR�SURGXFH�safe, nutritious chicken.

GOVERNANCEHow we have governed ourselves also has mattered. As a private company, we don’t face activist shareholders or the same regula-tory frameworks that public companies must cope with. That has allowed the Cargill board of directors to be agile in its approach to strategic development.

One obvious advantage is that the family operates more cohesively than independent shareholders in a public company. Our own-ers, for example, are dedicated to reinvesting 80 percent of earnings back into the company. This provides Cargill with the luxury of being able to invest a large proportion of earnings each year in acquisitions, plants, equipment, and innovative products and services. As we JURZ�SUR¿WDEO\��ZH�KDYH�PRUH�WR�UHLQYHVW�DQG�greater ability to leverage our position with GHEW�WR�IXUWKHU�¿QDQFH�LQQRYDWLRQ�DQG�LQYHVW-ments that fuel growth. This ability has been a necessary precursor to our ability to take a longer-term view and invest in the future.

Family shareholders, senior management, and external board members at Cargill talk of ³SDWLHQW�FDSLWDO�´�7KHUH�DUH�DFWXDOO\�WKUHH�Ps that are fundamental to our investing phi-losophy: private, permanent, and patient. As a private company, we are willing and able to

COMMITMENT TO EMPLOYEES :KLOH�&DUJLOO�LV�QRW�SHUIHFW��ZH�NQRZ�WKDW�ZH�only achieve our goals through our people. As a consequence, we work hard to provide a safe workplace and to value the unique contribu-tions of our global team. The conscientious treatment and development of our employ-HHV�KDV�OHG�WR�D�VWHDG\�LQÀX[�RI�WDOHQW�DQG�to greater continuity in our workforce than might be found at other companies.

This continuity no doubt has been helped by the company’s growth. Given Cargill’s growth in size and geographic reach, we’ve been able to provide multiple career paths to our top talent, all within one overall Cargill career. That stability of the broader workforce LV�UHÀHFWHG�LQ�SDUW�E\�VWDELOLW\�DW�WKH�WRS��3UR-IHVVRU�0LFKDHO�-DUUHWW��ZKR�LV�DI¿OLDWHG�ZLWK�,16($'��ZURWH�LQ�1RYHPEHU������WKDW�WKH�average tenure of a Fortune 500 CEO is about 4.6 years. Cargill has had nine top leaders in 149 years and six in the past 54 years.

CUSTOMER FOCUSAs our customers have grown, so have we. As they have thrived, so have we. As many have looked to grow into new markets through the years, they have approached Cargill, as a trusted supplier, to support those efforts in new parts of the world.

In the 1990s, we invested in Russia’s largest corn wet-milling plant in Efremov, an indus-trial town 240 miles southeast of Moscow, to support the growth strategy of Mars. The plant produced glucose sweetener, dextrose for fermentation applications in Russia’s pharmaceutical and vitamin industries, and corn-gluten meal for livestock feed. The facil-ity presented challenges, requiring a good deal of time and effort to get it in shape to meet Cargill quality and safety standards and to UHWUDLQ�WKH�ZRUNIRUFH��:KLOH�LW�WRRN�VRPH�WLPH�to get the facility up to our global standards, we later posted annual earnings that exceeded return expectations. The plant today supports

52!PERSPECTIVES ON THE LONG TERM

this is that these owners want not only to see WKH�FRPSDQ\�RSHUDWH�SUR¿WDEO\�EXW�DOVR�WR�GR�good and serve the family name proudly.

This has prompted Cargill to consider the long-term implications of its business for indigenous populations as it branches out, to take special care to minimize its impact on the environment, to commit to leadership in the areas of food safety, and to work with public-policy makers and nongovernmental organizations toward food security for the SHRSOH�RI�WKH�SODQHW��:KLOH�DQ�RUJDQL]DWLRQ�the size of Cargill cannot always avoid criti-cism or controversy, we depend on our values WR�JXLGH�RXU�DFWLRQV���:H�DOVR�NQRZ�WKDW�PDQ\�of our best customers are committed to these issues as well. Many of the public companies we work with have long shown admirable foresight and sounded the trumpet for environmental sustainability and responsible supply chains.

The Iroquois Nations’ constitution told its followers, “Look and listen for the welfare of . . . WKH�FRPLQJ�JHQHUDWLRQV�´�$V�D�IDPLO\�RZQHG�company, we’ve tried to do the same. Indeed, one Cargill family member some years ago commented, “My father said that if I take care RI�WKH�FRPSDQ\��LW�ZLOO�WDNH�FDUH�RI�PH�´

Just as we might have some advantages that lend themselves to longer-term thinking, we VWLOO�QHHG�WR�PDNH�VPDUW�GHFLVLRQV��:H�FDQQRW�afford to let the long term provide us with an excuse for underwhelming performance in the near term. Indeed, the challenge for any orga-nization is to achieve optimal performance over time, which requires both thinking about tomorrow and executing in smart ways today.:KHQ�&DUJLOO¶V�ERDUG��LWV�H[HFXWLYHV��DQG�LWV�

family owners talk about the company’s port-folio, we talk about it in the context of being resilient, balanced, and diverse. Thankfully, for nearly 150 years, we have done just that. Q

make investments for growth when opportu-nities arise, even when the rewards may not materialize in the near term. Indeed, it is not unusual for us to continue to invest straight through an economic downturn (as we did in recent years), when the tendency in some organizations may be to rein in expenditures. The family mind-set toward the capital it places in the company is that it is permanent. It views that capital as a vehicle for inter-generational wealth creation. Permanent, however, does not mean that we will not shed underperforming assets and businesses; we do and we will. But because we tend to think of our investments as a way to support the next generation of family owners, there is some thought as to managing our portfolio investments with a 30-year time horizon or a JHQHUDWLRQ�DQG�D�KDOI�SHULRG��:KHQ�ZH�VD\�³SDWLHQW�´�ZH�GR�QRW�PHDQ�FRPSODFHQW��UDWKHU��we recognize that many of the investments we make are cyclical in nature and that there are strategic reasons (competitive advantage, logistics, and geographic diversity, among others) that may prompt us to accept smaller short-term returns with the calculation that the returns will be at or better than hurdle rates over a longer period.

OUR BROADER PURPOSE The last of our seven guiding principles reads, ³:H�DUH�FRPPLWWHG�WR�EHLQJ�D�UHVSRQVLEOH�JOREDO�FLWL]HQ�´�:KHQ�ZH�JUDSSOHG�ZLWK�WU\LQJ�WR�GH¿QH�RXU�VWUDWHJLF�LQWHQW�IRU�RXU�SULYDWH��global company in the early 1990s, raising living standards around the world by deliver-ing value to producers and consumers was one of the company’s stated aims. In some ways, our long-standing cause has been about nourishing people. The family owners of the business feel a deep sense of responsibility for the company and its continuity; a corollary of

LEADING

1�9LUDO�$FKDU\D��&RQRU�.HKRH��DQG�0LFKDHO�5H\QHU��³7KH�YRLFH�RI�H[SHULHQFH��3XEOLF�YHUVXV�SULYDWH�HTXLW\�´�'HFHPEHU�������PFNLQVH\�FRP�2�$QGUHD�0XUSK\��³$PHULFD¶V�ODUJHVW�SULYDWH�FRPSDQLHV������´�)RUEHV, November 28, 2012, forbes.com.

PERSPECTIVES ON THE LONG TERM!53

Chanda Kochhar

Long-Term Planning In a Volatile EnvironmentPolitical upheaval, economic crisis, disruptive technology—in today’s world, it’s easy to lose sight of the goals that matter.

The world is changing rapidly, and for business, it is more volatile than ever. The trends that affect it most are often not linear or unidirectional. Instead, there are two-way swings, often large ones, which busi-nesses have to respond to. New regulations, for example, are substantially changing the ODQGVFDSH��SDUWLFXODUO\�LQ�¿QDQFLDO�VHUYLFHV��by imposing constraints but also by creating opportunities and promoting greater com-petition. Technology continues to transform business models, rendering some obsolete while opening up possibilities for value cre-ation. A new generation of socially networked digital customers is leading to a change in customer needs and preferences. These fac-WRUV�SRVH�VLJQL¿FDQW�FKDOOHQJHV�WR�ORQJ�WHUP�planning.

Yet precisely because of this environment of rapid change, long-term planning has become PRUH�LPSRUWDQW�WKDQ�HYHU�EHIRUH��:LWKRXW�D�guiding principle for long-term value creation, organizations run the risk of constantly being blown off course by short-term concerns. The key to success in this volatile world is to anticipate change and formulate and execute

Chanda Kochhar is managing director and CEO of ICICI Bank, India’s second-largest bank. She joined ICICI in 1984 and led many of its businesses before taking on her current role. She is widely recognized for helping to shape the retail-banking sector in India. Kochhar is a member of the Prime Minister’s Council on Trade and Industry and was cochair of the World Economic Forum Annual Meeting in 2011.

54!PERSPECTIVES ON THE LONG TERM

LEADING

1. DEFINE YOUR GOALThe starting point of long-term planning is to decide where you want to go. The leader’s role begins with envisioning the future of the organization and articulating it; then he or she must go on to translate that vision into measurable, time-bound interim objectives. They could be based on the potential of the PDUNHW��WKH�QHHG�WR�¿OO�JDSV�LQ�WKH�IUDQFKLVH�RU�WR�UHGH¿QH�WKH�DSSURSULDWH�¿QDQFLDO�EHQFK-marks, the need to meet challenges from key competitors, or the need to manage stake-holder expectations.

In 2009, we took stock of our business. :H�ZHUH�GHOLYHULQJ�D�UHWXUQ�RQ�HTXLW\�RI�OHVV�WKDQ�����SHUFHQW��:H�VHW�RXUVHOYHV�D�JRDO�RI�achieving a return on equity of 15 percent, almost double the level we were then hitting.

2. MAP OUT A STRATEGIC PATH+DYLQJ�GH¿QHG�WKH�ORQJ�WHUP�REMHFWLYH�� it is important to have a sequenced strategy to achieve it. The organization must have D�GH¿QHG�SDWK�WKDW�SULRULWL]HV�GLIIHUHQW�aspects of the business at different times, based on the progress achieved in the earlier stage.:H�VHW�RXW�D�WKUHH�VWDJH�SDWK��7KH�¿UVW�

VWDJH²EURDGO\��WKH�¿UVW�\HDU�RI�WKH�SODQ²ZDV�a period of consolidation and rebalancing of RXU�IXQGLQJ�SUR¿OH��FRVW�VWUXFWXUHV��DQG�FUHGLW�SRUWIROLR��:H�DUWLFXODWHG�WKH�SULRULWLHV�IRU�WKLV�SKDVH�DV�WKH�³�&V´��FXUUHQW�DQG�VDYLQJV�accounts (CASA), costs, credit, and capital. CASA represented our goal of strengthening RXU�IXQGLQJ�SUR¿OH�DQG�VXEVWDQWLDOO\�LQFUHDV-ing the proportion of checking accounts and retail deposits in our funding base. Costs rep-UHVHQWHG�RXU�IRFXV�RQ�RSHUDWLQJ�HI¿FLHQF\�WR�LPSURYH�SUR¿WDELOLW\�LQ�D�FKDOOHQJLQJ�HQYLURQ-ment for revenue growth. Credit represented our focus on changing the mix of our loan portfolio by reducing unsecured retail loans, thereby bringing credit costs under control. Capital represented our goal of conserving

responses, both strategic and tactical, in order to build sustainable competitive advantage.:H�KDYH�H[SHULHQFHG�WKHVH�FKDOOHQJHV�DW�

,&,&,�%DQN�RYHU�WKH�ODVW�¿YH�\HDUV��,�WRRN�over as CEO in 2009, when the world had MXVW�H[SHULHQFHG�D�JOREDO�¿QDQFLDO�FULVLV�WKDW�would have a far-reaching, long-term impact. It was a period of uncertainty and volatility. India, our home country, was quick to recov-er. In the two years immediately following WKH�FULVLV��ZH�KDG�*'3�JURZWK�RI�PRUH�WKDQ���percent, and many of us assumed that we had won the battle and growth was here to stay. But in 2011, we entered a period of prolonged HFRQRPLF�VORZGRZQ�DQG�YRODWLOLW\�LQ�¿QDQFLDO�markets that has lasted three years.

Today, we are in a period of renewed opti-PLVP�DQG�KRSH��*'3�LQ�,QGLD�JUHZ�����SHU-cent in the June quarter of 2014, the fastest pace in more than two years. Yet challenges remain, and risks—from geopolitical ten-

sions in some parts of the world to persistent domestic economic issues—still have the potential to affect our business. This is in addition to the longer-term structural trends like advances in technology and the possibil-ity of disruptive new business models, as well changes in policy and regulation.

KEY LESSONSSo how does one manage long-term objectives in a world of change and volatility? Here are ¿YH�WDNHDZD\V�IURP�P\�H[SHULHQFH�RYHU�WKH�ODVW�¿YH�\HDUV��

The starting point of long-term planning is to decide where you want to go. The leader’s role begins with envisioning the future of the organization and articulating it.

PERSPECTIVES ON THE LONG TERM!55

quickly recovered from the downturn of 2008 and was registering strong growth. The banking system was also growing at a rapid pace, and we were losing market share. The temptation for us was to compromise our SODQ�WR�FRUUHFW�RXU�IXQGLQJ�SUR¿OH�DQG�SUR¿W-ability metrics, and then pursue loan growth backed by wholesale funding. However, we understood that this would be unsustainable and hence stayed the course.

In subsequent years, once we achieved our WDUJHWV�RQ�IXQGLQJ�SUR¿OH�DQG�SUR¿WDELOLW\��ZH�were ready to accelerate growth. By this time, however, India was in the grip of an economic VORZGRZQ�DQG�DGYHUVH�FRUSRUDWH�FUHGLW��:H�therefore decided to calibrate our growth, even though it meant slowing down our plan to leverage capital and improve our return RQ�HTXLW\��,W�ZDV�QHFHVVDU\�WR�EH�ÀH[LEOH�DQG�balance growth with risk management in the changed environment.$W�WKH�VDPH�WLPH��ZH�DOVR�LGHQWL¿HG�DQG�

leveraged new opportunities. For example, about a year into our plan, we saw the opportunity to accelerate our time to mar-ket in building out the retail franchise by acquiring another bank. Acquisitions were not part of our original plan, but when we saw the opportunity, we quickly went ahead and integrated the acquired bank into our EXVLQHVV��:H�FUHDWHG�QHZ�PRGHOV�LQ�YDUL-RXV�DUHDV�RI�RXU�EXVLQHVV��:H�FUHDWHG�DQG�scaled up a low-cost branch model for serv-LQJ�XQEDQNHG�YLOODJHV��:H�LPSOHPHQWHG�D�number of technology initiatives focused on mobility, digitization, and branch automa-tion, to enhance the customer experience.

our strong capital position to maintain the strength of our balance sheet.

The second stage was focused on a renewal of balance-sheet growth combined with LPSURYHPHQW�LQ�SUR¿WDELOLW\��GH¿QHG�DV�WKH�return on assets through better margins, FRVW�HI¿FLHQF\��DQG�ORZHU�FUHGLW�FRVWV��:KLOH�staying with our longer-term goal of doubling RXU�UHWXUQ�RQ�HTXLW\��ZH�UHGH¿QHG�WKH�FRUH�HOHPHQWV�DV�WKH�³�&V�´�7KH�¿UVW�WKUHH²&$6$��costs, and credit—remained unchanged; WKH�IRXUWK�&��FDSLWDO��ZDV�UHGH¿QHG�WR�IRFXV�on leveraging the capital base for growth. A QHZ�GLPHQVLRQ�ZDV�DGGHG�WKURXJK�D�¿IWK�&��customer centricity, which involved renewing the promise of our brand to our customers and backing it with changes in organizational structures and processes to improve service delivery.

The third stage was to accelerate growth RQ�WKH�EDFN�RI�WKH�LPSURYHG�IXQGLQJ�SUR¿OH�DQG�SUR¿WDELOLW\�PHWULFV��DQG�OHYHUDJH�FDSLWDO�more rapidly to improve return on equity.

3. STAY THE COURSE—BUT BE FLEXIBLE WHEN REQUIREDChallenges to long-term planning come from the world around us. First, companies some-times feel a sense of lost opportunity when their organization’s priorities, as dictated by the long-range plan, require them to forgo some immediate opportunities. Second, changes in the environment sometimes change the assumptions on which the plan is based. It is important to have the strength of will and long-term focus not to be swayed by opportunities for short-term gains that may be unsustainable. At the same time, the orga-nization must be able to adapt the plan to changes in the environment when required.

In the early stages of our plan, we fre-TXHQWO\�IDFHG�WKH�¿UVW�FKDOOHQJH��:KLOH�ZH�were focused on consolidating our balance sheet and improving our funding, cost, and credit parameters, the Indian economy had

It is important to have the strength of will and long-term focus not to be swayed by opportunities for short-term gains that may be unsustainable.

56!PERSPECTIVES ON THE LONG TERM

achieving it. This starts within the organiza-tion—the plan must be explained to the team so that they understand the objectives, buy LQWR�WKH�VWUDWHJ\��DQG�H[HFXWH�LW�ÀDZOHVVO\��It must be explained to investors, so that they understand the organization’s approach to value creation. It must be explained to UHJXODWRUV��VR�WKDW�WKH\�KDYH�FRQ¿GHQFH�in the organization and are not taken by surprise by its strategy and the results of that strategy—particularly in the initial phase of H[HFXWLRQ�DV�VLJQL¿FDQW�FKDQJHV�DUH�PDGH�LQ�the organization.

As we embarked on our strategic path, a priority for me was to meet people in the organization at various levels, explaining to them what the new strategy would be and the logic behind the initiatives we were taking. I not only articulated our priorities EXW�DOVR�H[SODLQHG�KRZ�WKH\�¿W�LQWR�D� ORQJHU�WHUP��¿YH�\HDU�YLVLRQ�IRU�,&,&,�%DQN��and how they would position us for the next SKDVH�RI�JURZWK��:H�IROORZHG�D�VLPLODU�approach with other stakeholders, including investors, regulators, and customers. :H�DOVR�SHULRGLFDOO\�ZHQW�EDFN�WR�WKHVH�stakeholders to communicate the results of our strategy and where we were on our journey.

Through this long-term planning process, we did indeed achieve our return-on-equity objective and substantially enhanced share-holder value.

Long-term planning supports true value creation. It positions the business to capitalize on growth opportunities while ensuring not only the desired level of earn-ings and profitability but also stability and consistency in those metrics. Articulating long-term aspirations, adhering to them, and demonstrating progress in achieving them builds confidence among stakeholders about the resilience of the organization and its ability to achieve sustainable, profitable growth. Q

4. FOCUS ON EXECUTIONExecution is the key to a long-term plan’s success. The leader must not only envision the future of the organization, translate it into measurable objectives, and lay out the path to achieving those objectives but also be involved in the execution. The leader must stay in touch with the realities on the ground to ensure that the organization achieves its vision.

In our case, as we executed our plan, we had a regular process of structured reviews on our NH\�WDUJHW�PHWULFV��:H�IRFXVHG�QRW�RQO\�RQ�WKH�numbers but also on the underlying processes and enablers that we wanted to put in place to strengthen the franchise and create a sustain-DEOH�JURZWK�SODWIRUP��:H�DOVR�UHJXODUO\�WRRN�informal checks at the ground level to get a sense of how things were working on the front lines. To this day, I hold regular meetings

with employees of various grades, in which I listen to them share their experiences and the issues they face in executing the plan as well as consider the changes they suggest. Regular visits to branches whenever I travel help me get a feel for how well they are functioning. Feedback from both corporate clients and retail customers goes beyond data metrics in helping me monitor the quality of our fran-chise. All these bottom-up inputs then go into improving the execution of our strategy.

5. COMMUNICATE, COMMUNICATE, COMMUNICATEFinally, communicating the plan to all stake-holders is critical to winning their support in

LEADING

The leader must envision the future of the organization, translate it into measurable objectives, and lay out the path to achieving those objectives.

PERSPECTIVES ON THE LONG TERM!57

Kathleen McLaughlin and Doug McMillon

Kathleen McLaughlin is president of the Walmart Foundation and senior vice president of sustainability at Wal-Mart Stores, Inc.  Previously, she was a senior partner at McKinsey & Company and director of the firm’s social innovation practice. Doug McMillon is president and CEO of Wal-Mart Stores, Inc. He began his Walmart career in 1984 as an hourly summer associate in a distribution center and has gone on to serve in a variety of roles, including chief executive of the company’s Sam’s Club business unit and later Walmart’s International division, before assuming his current position.

Business and Society in the Coming Decades Companies have an opportunity to use their scale and expertise to reshape global systems and mitigate the complex problems facing society.

Business exists to serve society.Over the past several decades, one of the

great discussions within capitalism has cen-WHUHG�RQ�GH¿QLQJ�H[DFWO\�ZKDW�D�EXVLQHVV�LV�and what its obligations are to society at large and to the many stakeholders participating in business systems, including customers, shareholders, employees, suppliers, and com-munities, to name a few.

The obligations to society have been GH¿QHG�LQ�GLIIHUHQW�ZD\V�DW�GLIIHUHQW�SRLQWV��)RU�PDQ\�UHWDLOHUV��LQFOXGLQJ�:DOPDUW�IRXQG-HU�6DP�:DOWRQ��WKH�IRFXV�KDV�EHHQ�¿UVW�DQG�foremost on serving the customer. For others over the past couple of decades, the focus ZDV�P\RSLFDOO\�RQ�WKH�VKDUHKROGHU��:LWK�WKH�advent of shared-value, double-bottom-line, triple-bottom-line, and related movements, we have seen a broadening of the discus-sion to recognize the importance of multiple stakeholders and the need to promote social, HQYLURQPHQWDO��DQG�¿QDQFLDO�YDOXH��

Long-term capitalism goes one step further, asking companies to actively reshape the systems in which they operate. Those systems could include the complex of logistical and

58!PERSPECTIVES ON THE LONG TERM

LEADING

nesses. By collaborating with other members of their networks and pursuing initiatives that draw on their particular capabilities, they can make society stronger in ways that also fortify their business. There is generally ample scope to do this, even for companies facing near-term earnings pressure, because the overlap between short-term, close-in interests and longer-term, societal interests is almost always large.

THE BASICS: ADD VALUE FOR SOCIETY AS WELL AS BUSINESS:KHQ�LW�FRPHV�WR�VHUYLQJ�VRFLHW\��D�FRPSD-Q\¶V�¿UVW�WDVN�LV�WR�HQVXUH�WKDW�LWV�FRUH�EXVL-ness is fundamentally value creating—not just for shareholders but also for customers, employees, suppliers, communities, and the environment.

This stakeholder-value principle may seem obvious, especially given the extent to which triple-bottom-line thinking has seeped into PDLQVWUHDP�EXVLQHVV�GLVFRXUVH��<HW�¿QDQ-cial short-termism still drives day-to-day decision making for much of the corporate world. For many, shareholder value cre-ation remains the driving force of business initiatives; creating value for stakeholders becomes a by-product or a means to an end. Even when faced with reputational challeng-es, companies sometimes launch social ini-tiatives as side projects only tenuously linked to the core business, rather than strengthen-ing and articulating the ways in which the core business adds value to society.

Taking a more expansive view of serving VRFLHW\�PHDQV�¿UVW�HQVXULQJ�WKH�FRUH�EXVL-ness delivers value to the broader set of stakeholders. Is it adding value to the local community, for example, through taxes and engagement with local organizations? It also means addressing externalities related to the core business. $W�:DOPDUW��WKDW�LQFOXGHV�WU\LQJ�WR�PLQL-

mize the environmental footprint of our oper-

shipping services that move goods around the globe, the web of overseas contract manu-facturers on which companies rely, or the array of energy suppliers that fuel worldwide operations. Long-term capitalism takes a deeper view of business’s role in society, recognizing that, in the long run, the interests of stakeholders converge with the interests of the broader community. The actions of any one company may reverberate throughout the various systems in which it operates, generat-LQJ�VHFRQG��DQG�WKLUG�RUGHU�EHQH¿WV�DV�ZHOO�as negative externalities. Under long-term capitalism, companies recognize that fact and, WKURXJK�FRQFHUWHG�DFWLRQ�ZLWK�RWKHUV�RI�VXI¿-cient scale, work to ensure constant improve-ments to those systems.

There are compelling reasons companies should seize the initiative to drive social and EXVLQHVV�EHQH¿WV��)LUVW��LQ�DQ�LQWHUFRQQHFWHG�world facing unprecedented environmental and social challenges, society will demand it. Increasingly, a basic expectation among customers, governments, and communities will be that the companies they do business ZLWK�SURYLGH�D�VLJQL¿FDQW�QHW�SRVLWLYH�UHWXUQ�for society at large, not just for investors. This will be a part of the implicit contract or license to operate.

Second, adding these other forms of posi-tive return and improving systems will make the business more sustainable in the long term. Every company should be able to con-tribute value to society through its core busi-

Long-term capitalism takes a deeper view of business’s role in society, recognizing that, in the long run, the interests of stakeholders converge with the interests of the broader community.

PERSPECTIVES ON THE LONG TERM!59

contribution to making society stronger? At :DOPDUW��ZH�XVH�¿YH�VFUHHQV��

1. Prioritize Issues That Are Relevant to the Company MissionLike most companies, we look for those issues that sit at the convergence of our business interests and the interests of society. For example, as the world’s largest grocer, we believe the sustainability of the world’s food supply is one of the areas in which we can PDNH�D�VLJQL¿FDQW�FRQWULEXWLRQ��

The United Nations projects that food pro-duction must increase by roughly 70 percent to feed the estimated nine billion people who ZLOO�LQKDELW�WKH�SODQHW�E\�������:H�ZLOO�QHHG�WR�meet that challenge in a way that is sustainable for the environment and equitable for consum-ers and farmers (who make up two-thirds of the population in emerging markets). Our goal is to make the food system safer, more trans-parent, healthier, and more accessible—and to ORZHU�WKH�³WUXH�FRVW´�RI�IRRG�IRU�WKH�HQYLURQ-ment as well as customers and farmers.

2. Draw on the Company’s Particular CapabilitiesEven in purely philanthropic areas, compa-nies can have greater impact by drawing on their unique business capabilities and apply-ing those skills to complex societal problems. In our own efforts, we try to add value in ways that are different from—and ideally additive to—what others can do.

For example, to address hunger in the United States, we make use of our particu-lar assets. Over the past several years, we have donated nearly 1.5 billion pounds of food to food banks across the United States, including an increasing amount of fresh food nearing the end of its shelf life. This improves nutrition among those most in need, while reducing the amount of food we send to land-¿OOV�DV�ZDVWH��:H�DOVR�GRQDWHG�PRUH�WKDQ�����trucks and refrigerated trucks, as well as time

ations. Between 2010 and the end of 2013, we reduced our energy consumed per square foot by 7 percent, and we now source 24 percent of our global electricity needs from renewable sources—progress toward our long-term goal of 100 percent. By the end of 2014, we were diverting more than 80 percent of our waste LQ�WKH�8QLWHG�6WDWHV�IURP�ODQG¿OOV�WKURXJK�recycling and reuse, on our way to our goal of generating zero waste.

GO BEYOND THE CORE TO CHANGE THE SYSTEM:KLOH�LW�LV�LPSRUWDQW�WR�RSHUDWH�WKH�FRUH�EXVL-ness in a way that delivers value for society and the business, a healthy, high-performing company can and must go further. The world IDFHV�VRFLDO��HQYLURQPHQWDO��DQG�¿QDQFLDO�challenges of unprecedented magnitude and complexity. No one actor can resolve these issues single-handedly. Governments and civil society are increasingly calling business to the table.

Meanwhile, globalization and technology have heightened interdependence in our VRFLDO��HQYLURQPHQWDO��DQG�¿QDQFLDO�V\V-tems. Even seemingly small actions can have serious consequences for others far away in space and time. Globalization and technol-ogy have also greatly increased transparency. Actions and their consequences, however far removed, are much more visible to all.

These forces have increased the opportu-nities—and the responsibilities—of business. If in the past 20 years the discussion has been about the need for business to serve stakeholders beyond just the customer and the shareholder, the next 20 years will be about the need for companies to improve the networks and systems they depend on. Leading businesses are actively using their scale and their particular assets to accelerate progress on tough social and environmental issues. 6R��KRZ�FDQ�FRPSDQLHV�GH¿QH�WKHLU�XQLTXH�

60!PERSPECTIVES ON THE LONG TERM

LEADING

through 2012 and 2013, offering important EHQH¿WV�IRU�RXU�FXVWRPHUV�DQG�LPSURYLQJ�WKH�world’s food supply.

4. Reshape the System for Lasting ImprovementIn the era of long-term capitalism, compa-nies can and must go beyond the kinds of improvements described above. They can do this by harnessing their expertise and scale and by joining with other organiza-tions to reshape global systems for lasting improvement.

The global food system is essential to our business. For it and for us to succeed, the system must evolve in a way that is sustain-able for the environment and smallholder farmers around the world; the system also must be high-enough yielding to feed a grow-LQJ�ZRUOG�SRSXODWLRQ��:DOPDUW�LV�ZRUNLQJ�to enable that evolution. For more than a decade, we have been collaborating with the 86�$JHQF\�IRU�,QWHUQDWLRQDO�'HYHORSPHQW��86$,'��WR�LPSURYH�WKH�OLYHV�RI�VPDOOKROGHU�farmers and women in the agriculture supply chain. Through our direct farm initiative in &HQWUDO�$PHULFD��86$,'�DQG�LWV�LPSOHPHQWLQJ�agencies have provided agricultural expertise, training, and capital for infrastructure to smallholder farmers, preparing them to sell LQWR�WKH�RUJDQL]HG�UHWDLO�VHFWRU��:DOPDUW�SURYLGHV�VSHFL¿FDWLRQV�EDVHG�RQ�FRQVXPHU�preferences, guidance on timing for differ-ent crops and varieties, and regular pur-chase orders for offtake of farm production. Smallholders gain a better price and more stable income, as well as the skills to improve \LHOGV�DQG�SUR¿WDELOLW\��/RFDO�FXVWRPHUV�gain a wider variety of better-tasting fruits and vegetables at the time of year when they want to buy. The agriculture sector gains productivity and becomes more viable. In Argentina, for example, more than two-thirds of our fruit and vegetable supply now comes from such direct-farm programs. In

and expertise in logistics (since this is an area we understand well), to help strengthen the country’s charitable cold chain.

3. Aim for a Triple Bottom LineIn tackling priority issues, we design our ini-WLDWLYHV�WR�SURPRWH�EHQH¿WV�IRU�VRFLHW\�DV�ZHOO�DV�EXVLQHVV��:H�VHW�DPELWLRXV�WDUJHWV��DQG�ZH�track progress rigorously.

In food sourcing, for example, we pursue initiatives that lower the environmental and ¿QDQFLDO�FRVW�RI�IRRG�SURGXFWLRQ��2QH�RI�these initiatives, agriculture optimization, aims to reduce greenhouse-gas emissions by eight million metric tons across ten million acres of row crops such as oats and rice by 2020. Similar initiatives in the food chain and our own operations have allowed us to reduce our greenhouse-gas emissions by approximately 18 million metric tons since 2010. To do so, we are working with the (QYLURQPHQWDO�'HIHQVH�)XQG��DV�ZHOO�DV�other large food companies, including Cargill

and General Mills, to adjust the use of fertil-L]HU�DQG�RWKHU�LQSXWV��:H�PHDVXUH�SURJUHVV�by tracking improvements in greenhouse-gas emissions, water, yields, and other critical factors per ton of food produced, by supplier and by category.

Such initiatives provide classic triple-bot-tom-line results. Besides the important reduc-tion in greenhouse-gas emissions, they helped us to cut the price of fruits and vegetables in the United States by a total of $3.5 billion

In the era of long-term capitalism, companies can and must harness their expertise and scale and join with other organizations to reshape global systems for lasting improvement.

PERSPECTIVES ON THE LONG TERM!61

to sparking collaborative commitments from corporations, to name just a few.

EMBED THE VALUES IN THE BUSINESSThe commitment to address social and environmental issues should be a “whole company” undertaking, woven into day-to-day business activities; it’s not just a matter of corporate philanthropy.

Many companies, including Walmart, devel-op social and environmental priorities as part of annual business-planning efforts. We have made bold, public commitments—for example, to help train one million farmers by 2015 and to source 100 percent sustainable palm oil by 2015. These commitments focus our efforts and force innovation. Many of these commit-ments are made jointly with suppliers and our partners at nongovernmental organizations.

Leaders in the company, including the heads of business units and functions, set the social and environmental agenda for their respective parts of the operation. They set targets and cascade those down the line into the individual performance evaluations and business reviews of their team members. The capital-planning process explicitly addresses the social and environmental agenda.

In the long term, a company’s business interests and the interests of society converge. Companies, communities, individuals, and governments: we are all interdependent. Every healthy, high-performing company has an obligation to use its strengths to help soci-ety, and each can do so in ways that enhance the viability of the business, too. From how products are grown and made to how they’re transported and sold, companies can pursue innovative new methods and processes that SURYLGH�ODVWLQJ�EHQH¿WV�WR�WKHLU�VWDNHKROGHUV�and to the communities in which they operate.

Large-scale change does not happen over-QLJKW��EXW�WKH�VWDNHV�DQG�SRWHQWLDO�EHQH¿WV�are immense. Q

our US private-label supply chain alone, we depend upon roughly $4 billion per year in agricultural products from small and midsize farmers.

Now we are exploring opportunities to collaborate with others to strengthen trans-portation and processing infrastructure in emerging markets. This will help develop local economies, feed local populations, and support local farming families, all while providing a secure supply of high-quality food products for Walmart customers.

5. Engage Partners in Transforming SystemsTo achieve lasting solutions to complex social and environmental challenges, we have learned that it is essential to engage and col-laborate with other leaders of the systems we seek to strengthen. 7KH�GLI¿FXOW�FKDOOHQJHV�IDFLQJ�WKH�ZRUOG�WRGD\�

are well beyond the scope of any single player to address. Solutions will depend on coopera-tion among leading organizations in all sectors.

To achieve the magnitude of change the United Nations, World Wildlife Fund, CDP and others have called for in food, such as a reduction in water usage, a 3 percent annual decrease in private-sector greenhouse-gas emissions, and a 15 percent increase in yield in the next ten years, leaders of the food system must take concerted, coordinated action. In recent years, there has been an explosion in the number of multistakeholder collaborations in the food system, including the Consumer Goods Forum, which aligns retailers and manufacturers in achieving global food commitments such as sourcing 100 percent sustainable palm oil and soy; the World Economic Forum, with its Grow Africa and related initiatives; USAID’s Global Development Lab, to harness the power of the private sector and others in addressing development challenges; and the Clinton Global Initiative, with its innovative approach

PERSPECTIVES ON THE LONG TERM!63

An Unshakable Belief In the Long TermADRIAN ORR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Capitalism in The Postfinancial EraJOHN D. ROGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

GIC’s Long-Term ViewLIM CHOW KIAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Getting Beyond The Data PointEUAN MUNRO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Reporting for The 21st CenturyCHARLES TILLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

A Single Ladle from A Flowing Stream LEI ZHANG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Building a Business-Owner Mind-SetMICHAEL SABIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

The Long-Term Imperative For Financial InstitutionsJAMES P. GORMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

INVESTING

64!PERSPECTIVES ON THE LONG TERM

INVESTING / Adrian Orr

Adrian Orr is CEO of the New Zealand Superannuation Fund. Previously, he served as deputy governor of Reserve Bank of New Zealand and as the chief economist at Westpac bank and the National Bank of New Zealand. He has also worked at the New Zealand Treasury and the Organisation for Economic Co-operation and Development in Paris. He is deputy chair of the International Forum of Sovereign Wealth Funds and of the Pacific Pension Institute.

An Unshakable Belief in The Long TermSafeguarding capital for the future generations of a nation should be easy, but our natural human frailties make it hard. Success requires good governance, a principled view of global markets, and the courage to stick with those principles through good times and bad.

The general nature of the problems that bedevil the long-term investor are explained well and in substantial detail elsewhere. I offer a perspective from the Guardians of New Zealand Superannuation, a New Zealand government entity established to prefund future pension liabilities, on some of these issues in this article. I focus on the view that good governance is the indispens-able prerequisite for successful long-term investment.

Earlier this year, I had the privilege of VSHDNLQJ�ZLWK�VHYHUDO�3DFL¿F�,VODQG�8QL-versity students in New Zealand about their opportunities. For whatever insight I may have provided, I was thoughtfully and generously thanked with some of Auckland’s ¿QHVW�EDNLQJ��8QGHU�XVXDO�FLUFXPVWDQFH��gifts received by the Guardians are auctioned to staff at the end of the year, with proceeds going to charity. The cupcakes, however, by virtue of being perishable and valued at under $50 (though I thought them priceless), made their way home that evening, to the apprecia-

PERSPECTIVES ON THE LONG TERM!65

dislocation and turmoil. In other words, the long-term investor must have the resources and discipline to resist short-term forces that could cause a deviation from the overarching strategy.

This discipline must be institutionalized. The Guardians are only able to maintain this control because certain institutional char-acteristics are to the fore: a government and EHQH¿FLDU\�WKDW�KDV�JUDQWHG�D�FRPPHUFLDOO\�focused mandate to a board that then inde-pendently decides on a desired risk-return SUR¿OH�DQG�LQYHVWPHQW�VWUDWHJ\�IRU�WKH�IXQG��the board’s support of management in the H[HFXWLRQ�RI�WKH�VWUDWHJ\��OLPLWHG�FODLPV�RQ�FDSLWDO��VXI¿FLHQW�OLTXLGLW\��DQG�JHQHUDOO\�ORZ�levels of peer and agency risk.

Before I turn to the links between these characteristics and our governance arrange-ments, it is useful to summarize the advan-tages we see in long-term investing. Each is conditional on a particular belief about the QDWXUH�RI�¿QDQFLDO�PDUNHWV�DQG�WKDW�RI�RWKHU�participants.

One of our investment beliefs is that ¿QDQFLDO�PDUNHWV�DUH�QRW�SHUIHFW²VKRUW�WHUP�EHKDYLRU�LV�ERWK�FDXVH�DQG�FRQVHTXHQFH²implying that there are substantial periods of time when asset prices become unanchored from their fundamental values and that prices do, eventually, return to these values. If the views on the core investment risks that we are willing to adopt do not change with prices or other market developments, then it makes sense for the fund to invest against the market. We look to buy when others panic and sell, and we look to sell when others are

tion of both my family and Bud, the dog. Like all gifts and hospitality received by

fund staff, the baking was duly entered into a register that was published at the end of the ¿QDQFLDO�\HDU�WRJHWKHU�ZLWK�WKH�GHWDLOHG�DQG�complete records of our portfolio strategies, investment managers and holdings, perfor-mance, compensation, expenses, and other miscellany.

We take full transparency as the default starting point at the Guardians. It forms a bedrock element of governance arrange-ments that cascade all the way from our founding legislation to the policies that set out delegated authorities, asset allocation, and enterprise risk management. It also LQIXVHV�D�FRPPLWPHQW�WR�D�FXOWXUH�GH¿QHG�E\�constructive achievement. Our transparency is intended to mitigate the agency problems that inevitably arise in the management of RWKHU�SHRSOHV¶�PRQH\²SUREOHPV�WKDW�DUH�PRUH�GLI¿FXOW�WR�UHVROYH�WKH�ORQJHU�WKH�LQYHVW-ment horizon.

THE GUARDIANS AS A LONG-TERM INVESTORThe “long term” means different things to different people, and we have found it essen-tial to sieve through theory and practice to establish consistent thinking on this in the context of our goals, endowments, beliefs, and capabilities. Our deliberations have yielded a distilled view on what it means to be a long-term investor. More importantly, we have asked ourselves if we have the capacity and judgment to take the long view in our own investments and reap the advan-tages that are available to such an investor.1 )RU�XV��WKH�PRVW�XVHIXO�GH¿QLWLRQ�LV�WKDW�D�long-term investor is one who can hold any investment strategy for as long as the inves-tor wishes. Therefore, investing for the long term is largely concerned with the ability to control the deployment of risk capital at all times, and especially at times of market

The long-term investor must have the resources and discipline to resist short-term forces that could cause a deviation from the overarching strategy.

66!PERSPECTIVES ON THE LONG TERM

long-term holdings are also advantageous for the companies we invest in. For example, the natural life cycle of assets such as forests, infrastructure, and unlisted companies gears them toward returns in the long term. Such opportunities may struggle to attract com-petitive capital from investors with shorter-term investment horizons, making it less likely they will be funded. More generally, FRQ¿GHQW�LQ�WKH�NQRZOHGJH�WKDW�WKHLU�LQYHV-WRUV�DUH�QRW�ÀLJKW\��LQYHVWHH�FRPSDQLHV�DUH�freed from the requirement to focus on short-WHUP�HDUQLQJV�DQG�SUR¿WV�DQG�FDQ�LQVWHDG�VHW�VLJKWV�RQ�GH¿QLQJ�DQG�H[HFXWLQJ�VWUDWHJLHV�for the long term.

Finally, at the fund, we characterize investment themes as the long-term secular LQÀXHQFHV�RQ�WKH�JOREDO�HFRQRP\�WKDW�DUH�inexorable and invariant to business cycles. For example, the aging of populations, the warming of our climate, and the urbanization of developing countries are themes that will play out over several generations irrespective of the periodic booms and busts of the global economy. As long-term investors, we are ideally suited to examining the implications and positioning ourselves to invest in oppor-tunities that will only yield returns as the themes mature.3

THE ROLE OF GOVERNANCEOur pursuit of these advantages requires that we identify the right investment strategies and then demonstrate the wherewithal to persist with them during market rallies and declines. Steady hands are of course impor-tant during the good times: discipline must be maintained in rebalancing portfolios, in selling when prices exceed valuations, and in resisting competing for overpriced assets. However, it is in the bad times that our mettle as a long-term investor is truly tested. Hap-pily, this is also when the available advan-tages and a long-term investor’s endowments can be fully harvested. Maintaining focus

euphoric and eager to purchase. Our view allows us to be more levelheaded, to discount short-term manias and panics in equal PHDVXUH��DQG�WR�VHHN�ORQJ�WHUP�SUR¿W�IURP�these instead.

One consequence of panics and crashes is that when they occur, the market balance between demand and supply tilts overwhelm-ingly in favor of supply, with most either looking to sell or, as is more likely, being IRUFHG�WR�VHOO�WR�PHHW�WKHLU�RWKHU�¿QDQFLDO�obligations. In anticipation of these times, assets considered easier to sell quickly as the need arises trade at a premium to illiquid assets. A long-term investor who generally GRHV�QRW�KDYH�RWKHU�¿QDQFLDO�REOLJDWLRQV�WKDW�IRUFH�KLP�RU�KHU�LQWR�VHOOLQJ�FDQ�EHQH¿W�IURP�acquiring the illiquid assets that are cheaper because they are less attractive to the general

(short-term) investor. Given that a long-term investor can invest in anything that a short-term investor can but is also more likely to FRQVLGHU�LOOLTXLG�DVVHWV��WKH\�EHQH¿W�IURP�LQFUHDVHG�FKRLFH�DQG�EHWWHU�GLYHUVL¿FDWLRQ�2

The investment markets are character-ized by relationships that are distanced and transient. If, instead, we can forge strong relationships with the companies we invest with where all partners are aligned on generating long-term value, then, again, a potentially wider investment universe opens up to the fund. This is an advantage as long as our belief holds that these long-term relationships have the capacity to enhance risk-adjusted returns. Incidentally, secure

It is in the bad times that our mettle as a long-term investor is truly tested. Happily, this is also when the available advantages can be fully harvested.

INVESTING

PERSPECTIVES ON THE LONG TERM!67

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VSHFL¿F�LQYHVWPHQW�VWUDWHJLHV��7KH�DQFKRULQJ�of our investment strategies to our endow-ments and beliefs enables us to stay true to our stated investment course, often when it feels the most unnatural. For example, it was exactly this anchoring that allowed us to QHJRWLDWH�WKH�GHSWKV�RI�WKH�JOREDO�¿QDQFLDO�crisis with a sense of opportunity rather than dread by retaining the focus on the important questions: Have our beliefs changed? Are our strategies correct? Do we have the capability WR�PDQDJH�GD\�WR�GD\�¿QDQFLDO�RSHUDWLRQV�LQ�an unprecedented credit environment?

Our endowments and our long-term investment strategies that rest on clearly articulated beliefs can be made irrelevant if either the investment process or execution that follows is shoddy. How do we ensure consistency and discipline in our investment decisions, and how do we justify our choices? How do we balance the desired continuity and institutional perspective with dynamic, clever people?

LV�GLI¿FXOW��DQG�LW�LV�KXPDQ�QDWXUH�WR�ÀHH�WR�safer shores (and thus dampen career risks). Good governance arrangements, agreed to in advance and relatively immutable, combat these tendencies.

The Guardians use to the fullest extent our enabling legislation, which provides opera-tional independence and a wide investment VSHFWUXP��7KLV�SURYLGHV�XV�WKH�FRQ¿GHQFH�to enter into investment arrangements that best suit the fund’s long-term purpose, with minimal agency risks that our owner (the government of New Zealand) will suddenly change our mandate. Our sovereign status is DOVR�EHQH¿FLDO�LQ�EULQJLQJ�WKH�SRWHQWLDO�IRU�us to be regarded favorably as stable sources of capital by business partners at home and abroad.,Q�WKH�DEVHQFH�RI�VXI¿FLHQW�LQIRUPDWLRQ�

DERXW�WKH�QDWXUH�RI�WKH�¿QDQFLDO�PDUNHWV��there is substantial room to be swayed by fads and ideas that promise superior returns. Consequently, it is essential to distinguish between these and genuine investment insight, and this begins by articulating a well-founded investment philosophy, or set of investment beliefs. These beliefs are framed not just by an investor’s understand-ing of market characteristics but also by the introspection required to identify their own strengths and weaknesses. As my col-league David Iverson writes in Strategic Risk Management: A Practical Guide to Portfolio Risk Management (Wiley, November 2013), “Investors without strong investment beliefs tend to drift from one strategy to the next. . . . Investors with clear investment beliefs tend to be more consistent and disciplined in their investment strategies and are more likely to achieve their investment objectives.”

The Guardians have put in substantial effort at identifying our core investment beliefs, and our investment-decision process is fundamentally linked to these. The shared EHOLHIV�JLYH�XV�WKH�FRQ¿GHQFH�WR�FKRRVH�

Transparency is fundamental to the Guardians of New Zealand Superannuation; even the cupcakes must be accounted for.

68!PERSPECTIVES ON THE LONG TERM

consistent methods and inputs. This allows us to clearly understand the additional risks each investment brings to our benchmark-reference portfolio, the return we expect to compensate for those risks, and the initial signal to allocate capital to and from invest-ments on a timely, consistent, and commer-cial basis.

Finally, I note another element of our gov-ernance framework, sometimes overlooked by others, that relates to responsible invest-ment. We believe that responsible investors must have concern for environmental, social, and governance factors because they are material to long-term returns. Our view is that constructive engagement is both good for returns and the advancement of our objective to be active owners and responsible investors. We also acknowledge the wider EHQH¿FLDO�LPSDFW�RQ�FRUSRUDWH�SUDFWLFH��regulatory standards, and the general functioning of capital markets from active, constructive engagement.

Good investments will come and go, and views on good investment strategies will change only slightly less often. However, it is a good governance framework that will primarily give the Guardians the discipline, courage, and consistency to stay the course and achieve our mission of reducing the tax burdens on future New Zealanders. Hav-ing been granted a “license to operate” on the basis of this framework, we owe it to our sponsors and all New Zealanders to be trans-parent and accountable for the choices we PDNH²ULJKW�GRZQ�WR�FXSFDNHV�WDNHQ�KRPH��Q

In resolving these questions, we have decided on a benchmark investment strat-egy founded on a low-cost, passive, readily implementable global portfolio expected to achieve the fund’s objective. This reference portfolio is chosen by the board and embod-ies its view of the risks that are appropriate for the Guardians as a long-term investor. For whatever other investment strategies we

may choose, the reference portfolio allows all to gauge whether our activities add value. Separately, the single reference-portfolio con-struct also supports our cultural ambitions of working together as one team pursuing our collective goal.

For the active investment decisions we make, we have established a risk-allocation process that allows us to rank opportunities E\�¿QDQFLDO�DWWUDFWLYHQHVV��H[SHFWHG�UHWXUQV�DGMXVWHG�IRU�ULVN�DQG�RXU�FRQ¿GHQFH��DQG�consistency with our endowments, beliefs, target operating capabilities, and responsi-ble-investment commitments. In short, we periodically identify and quantify the sources of risk and return in all active opportuni-ties, including those already mandated using

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1 My comments in this section summarize the more detailed views in Sue Brake and Rishab Sethi, “The advantages of being a long-term investor,” Guardians of New Zealand Superannuation “How We Invest” white paper, September 2014, nzsuperfund.co.nz.2�2I�FRXUVH��LQFUHDVHG�FKRLFH�LV�RQO\�EHQH¿FLDO�ZKHQ�WKHVH�FKRLFHV�FDQ�KHOS�LPSURYH�SRUWIROLR�ULVN�DGMXVWHG�UHWXUQV��6HH�-RH�&KHXQJ��³'LYHUVL¿FDWLRQ�´�*XDUGLDQV�RI�1HZ�=HDODQG�6XSHUDQQXDWLRQ��³+RZ�:H�,QYHVW´�ZKLWH�SDSHU��6HSWHPEHU�������Q]VXSHUIXQG�FR�Q]�3�7KHVH�EHQH¿WV�DUH�FRQGLWLRQDO�RQ�D�GHJUHH�RI�PLVSULFLQJ�LQ�WKH�RSSRUWXQLWLHV�DQG�WKH�HYLGHQFH�IRU�WKLV�LV�PRUH�XQFHUWDLQ�WKDQ�IRU�WKH�RWKHU�advantages described.

Responsible investors must have concern for environmental, social, and governance factors because they are material to long-term returns.

PERSPECTIVES ON THE LONG TERM!69

John D. Rogers

Capitalism in The Postfinancial EraTempered by crisis, global in outlook, and focused on a time horizon measured in decades, the fiduciary capitalist is poised to take center stage.

It is very likely WKDW�WKH�JOREDO�¿QDQFLDO�FULVLV�of 2007–08 will have been the single most disruptive event in the careers of investors alive today. Many of us have family members who lived through the Great Depression of the 1930s. That generation carries memo-ULHV�RI�EDQN�IDLOXUHV�DQG�¿QDQFLDO�PDUNHW�GLVWUHVV�WKDW�KDYH�SURIRXQGO\�LQÀXHQFHG�its own investment and savings choices. A large number of people who came of age during the Great Depression emerged from the experience with a profound mistrust of ¿QDQFLDO�LQVWLWXWLRQV��7KH�WUDXPD�RI�WKRVH�times energized policy initiatives and labor unions’ support of government social security DQG�GH¿QHG�EHQH¿W�SHQVLRQ�SODQV�WR�SURYLGH�workers and voters an economic safety net QRW�IRXQG�LQ�WKH�¿QDQFLDO�V\VWHP�

It remains to be seen how the global ¿QDQFLDO�FULVLV�ZLOO�DIIHFW�WKH�JHQHUDWLRQ�WKDW�MXVW�OLYHG�WKURXJK�LW��$OWKRXJK�¿QDQFLDO�markets have largely returned to pre-crisis levels, the trauma is likely to haunt us for decades to come. Already, we can see at least RQH�LPSRUWDQW�FKDQJH��WKH�HUD�RI�³¿QDQFLDO-ization” that lasted from about 1980 until 2007 is over, and a different set of economic GULYHUV�LV�WDNLQJ�LWV�SODFH��7KH�³¿QDQFLDO�capitalism” of that span of years should be viewed as an anomaly. The historical role of

John D. Rogers is a director at OM Asset Management. Previously, he served as chief executive of the CFA Institute and as CEO of Invesco’s worldwide institutional business. Rogers is a chartered financial analyst and holds a BA from Yale University and an MA from Stanford University.

70!PERSPECTIVES ON THE LONG TERM

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funds. These institutions have an agenda that supports long-term thinking. The larger of these institutions have become “universal owners,” bound to the overall outcomes of the global economy over many decades to come. As such, they are virtually obliged to engage with companies’ management teams and public-policy makers on governance and VWUDWHJ\��8VLQJ�WKH�ODQJXDJH�RI�HFRQRPLVWV��they seek to minimize negative externalities and reward positive ones.3 These inves-tors are generally too large to engage in short-term investment strategies, and it is in their interest to minimize costs, which in the aggregate are a drag on returns to their EHQH¿FLDULHV�

FIDUCIARY CAPITALISM IN HISTORICAL CONTEXTFrom the standpoint of economic drivers, I believe there have been three major eco-nomic eras over the past 60 years. First was the period from 1945 to 1980 that is often termed industrial or managerial capitalism.4 Within leading free-market post–World War II economies, the corporate issuer of debt and equity was the dominant force in capital formation. A great deal of this occurred through bank loans, and corporate-gover-nance problems were minimized through HLWKHU�GLVSHUVHG�RZQHUVKLS��WKH�8QLWHG�States) or cross-holdings (Germany and -DSDQ���0DQ\�UHPHPEHU�WKLV�HUD�IRU�WKH�ULVH�of conglomerates and “national champions,” which were nurtured with export-oriented market-share strategies. An analog to this in many of the socialist nations of the time would be state capitalism, where national wealth was channeled through government ¿QDQFLDO�LQVWLWXWLRQV�DQG�GLUHFWO\�WR�JRYHUQ-ment-owned entities.

Then, in the early 1980s, a 30-year decline in interest rates began. At the same time, ¿QDQFLDO�PDUNHWV�LQ�WKH�:HVW�ZHUH�GHUHJX-ODWHG��¿QDQFLDO�HQJLQHHULQJ�EHFDPH�D�QHZ�

¿QDQFH�LV�WR�HQDEOH�HFRQRPLF�SURJUHVV��7KH�HUD�RI�¿QDQFLDOL]DWLRQ�WR�VRPH�H[WHQW�WXUQHG�WKLV�RQ�LWV�KHDG��DQG�¿QDQFH�EHFDPH�YLHZHG�as an end unto itself, rather than as a means WR�DQ�HQG��0\�EHOLHI�LV�WKDW�WKH�JOREDO�¿QDQ-cial crisis served as the catalyst to usher the ¿QDQFH�VHFWRU�EDFN�WR�LWV�KLVWRULFDO�UROH�DV�DQ�enabling function.

The great opportunity for those in the ¿QDQFLDO�FRPPXQLW\�WRGD\�LV�WR�VXSSRUW�WKLV�type of healthy redirection by focusing on the long term. We live in an age when the environmental consequences of economic and human activity threaten the sustainabil-ity of life as we know it. Short-term thinking, which has contributed to these threats, is also the bane of corporate executives, policy mak-ers, and the people who must live with the consequences of opportunism. Fortunately,

there are some emerging themes within the investment community that may help counteract destructive short-termism. These forces, which I will group under the term ³¿GXFLDU\�FDSLWDOLVP�´1 are outlined in the next few pages.2 ,Q�D�¿GXFLDU\�FDSLWDOLVW�HFRQRP\��OHDGHU-

ship in the deployment of capital comes from institutional investors with a long-term ori-entation. These institutions and their staffs DUH�LQ�YLUWXDOO\�HYHU\�FDVH�¿GXFLDULHV��ERXQG�to a duty of care and loyalty and obliged to SODFH�WKH�QHHGV�RI�WKHLU�EHQH¿FLDULHV�DERYH�all other considerations. The main players in this group are pension funds, endow-ments, foundations, and sovereign-wealth

The global financial crisis served as the catalyst to usher the finance sector back to its historical role as an enabling function.

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PERSPECTIVES ON THE LONG TERM!71

the leveling power of technology, and their shared agendas:Q Size. Fiduciary institutions have grown to be among the world’s largest investors. Even when agents (investment-management FRPSDQLHV�DQG�RWKHU�IRU�SUR¿W�HQWLWLHV��DUH�H[FOXGHG��WKH�WRS�������VXFK�¿GXFLDULHV�worldwide account for $25 trillion, or close to half the value of the world’s equity markets.9 These investors, either acting alone or in con-cert, command the attention of corporations and policy makers. Q Technology. Technology has leveled the SOD\LQJ�¿HOG�LQ�¿QDQFH��)RU�GHFDGHV��EURNHUV�and investment bankers enjoyed an asym-metric information advantage over their institutional clients. Today, that information gap is mostly gone. The digital age has put as much computing power and market access LQWR�WKH�KDQGV�RI�ODUJH�¿GXFLDULHV�DV�LQ�WKH�hands of brokers and bankers. Sophisticated asset owners are moving their business away from traditional capital marketplaces.

area of specialization, and we witnessed the DVFHQGDQFH�RI�ZKDW�LV�RIWHQ�WHUPHG�¿QDQFLDO�FDSLWDOLVP��RU�¿QDQFLDOL]DWLRQ�5 The biggest ZLQQHUV�LQ�WKLV�HUD�ZHUH�JOREDO�¿QDQFLDO�LQWHUPHGLDULHV²EDQNV��DVVHW�PDQDJHUV��DQG�EURNHUDJH�¿UPV²WKDW�EHQH¿WHG�IURP�deregulation, technology, globalization, and a lower cost of funds, which supported greater leverage on their balance sheets.

These salubrious developments allowed the ¿QDQFLDO�VHFWRU�WR�DFKLHYH�ZHOO�DERYH�DYHUDJH�growth in revenues, earnings, and market capitalization. Employment in the sector ERRPHG��DQG�JRRG�MREV�LQ�¿QDQFH�EHFDPH�JOREDO�SDVVSRUWV�WR�VXFFHVV��$V�D�VKDUH�RI�86�*'3��¿QDQFLDO�VHUYLFHV�JUHZ�IURP�����SHUFHQW�in 1980 to 8.3 percent in 2006.6 During this era, the public’s (and many industry partici-SDQWV¶��SHUFHSWLRQ�RI�¿QDQFH�FKDQJHG��,WV�existence began to be seen as an end itself, rather than as an enabling function.7 This JROGHQ�HUD�IRU�¿QDQFLDO�VHUYLFHV�HQGHG�EDGO\�LQ������ZLWK�WKH�RQVHW�RI�WKH�JOREDO�¿QDQ-FLDO�FULVLV��:KLOH�LW�LV�GLI¿FXOW�WR�XQWDQJOH�and pinpoint the causes of the crisis, the ¿QDQFH�LQGXVWU\�WRRN�WKH�EUXQW�RI�WKH�EODPH��Researchers at the Federal Reserve Bank of 'DOODV�KDYH�HVWLPDWHG�WKDW�WKH�JOREDO�¿QDQFLDO�FULVLV�FRVW�WKH�86�HFRQRP\�EHWZHHQ����WULOOLRQ�and $14 trillion, or $50,000 to $120,000 IRU�HYHU\�86�KRXVHKROG�8 Not surprisingly, the public today overwhelmingly mistrusts ¿QDQFLDO�LQVWLWXWLRQV��'HOHYHUDJLQJ�LV�QRZ�SDUW�RI�JOREDO�¿QDQFLDO�LQVWLWXWLRQV¶�DJHQGD��and regulatory and prudential oversight of ¿QDQFLDO�LQVWLWXWLRQV�LV�SDUW�RI�PRVW�JRYHUQ-mental agendas.

FIDUCIARIES AS GLOBAL LEADERS2XW�RI�WKLV�GLI¿FXOW�SHULRG��OHDGHUVKLS�LQ�¿QDQFH�DQG�WKH�HFRQRP\�FRXOG�FRPH�IURP�¿GXFLDU\�FDSLWDOLVWV��7KHUH�DUH�WKUHH�PHJD-trends supporting the idea that institutional investors could lead such an era of longer-term thinking. These include their size,

The collapse of Lehman Brothers in 2008 brought the global financial crisis to a head. The trauma of that crisis will haunt investors for decades to come.

72!PERSPECTIVES ON THE LONG TERM

returns that are expected by their ultimate EHQH¿FLDULHV��,Q�VRPH�FDVHV��WKHVH�UHWXUQV�are not purely economic. Social and environ-mental outcomes may be part of the mission of these investors, particularly in the case of foundations and sovereign-wealth funds. Moreover, many asset owners, for example, endowments, are “permanent” with regard to their expected lives. Their boards have come WR�UHDOL]H�WKDW�EHQH¿FLDULHV����RU�����\HDUV�IURP�QRZ�ZLOO�LQKHULW�QRW�RQO\�WKH�SUR¿WV�EXW�also the positive and negative externalities of the investments made by the fund today.

When we combine size, skill, and these agenda points, it is easy to understand that a QXPEHU�RI�ODUJH�¿GXFLDU\�LQYHVWRUV�DUH�LQ�WKH�position of essentially owning all the out-comes of the world’s corporate activity, far into the future. They have become “universal owners.” As such, they have no choice but to become engaged in corporate governance and public-policy issues. The universal-owner label describes this reality, which is reluc-WDQWO\�DFFHSWHG�E\�VRPH�¿GXFLDU\�LQYHVWRUV�and embraced by others.11�$Q�HUD�RI�¿GX-ciary capitalism begins when the majority of these organizations begin to act on their inherent advantages and responsibilities: a long-term investment horizon, the ability to change corporate behavior through effective engagement, and a comprehensive approach WR�DFFRXQWLQJ�IRU�FRVWV��EHQH¿WV��DQG�LQYHVW-ment results.

THE ROAD TO FIDUCIARY CAPITALISMA number of things need to happen for the WUDQVLWLRQ�WR�¿GXFLDU\�FDSLWDOLVP�WR�RFFXU��There needs to be more empirical evidence that “good governance” leads to higher performance over long time periods. Such evidence, which has begun to accumulate, will lead to an explosion of products and invest-ment strategies delivered by agents, oriented toward this source of alpha. Today’s account-LQJ�VWDQGDUGV�GR�QRW�VXI¿FLHQWO\�DGGUHVV�

Institutions are doing business directly with one another and as equal counterparts to VHOO�VLGH�¿UPV�10 Indexing, exchange-traded funds, and the availability of derivatives in DOPRVW�DQ\�ÀDYRU�KDYH�UHQGHUHG�PXFK�RI�WKH�world’s capital markets in the category of commodity products. With this, many insti-tutional investors have chosen to “insource” the management of large portions of their asset pools. These investors are focused on low costs and a high degree of control. In Singapore, the $100 billion GIC, formerly known as the Government of Singapore Investment Corporation, employs more than 500 investment professionals, rivaling any DVVHW�PDQDJHPHQW�¿UP�RU�VHOO�VLGH�UHVHDUFK�department in sophistication. Institutional LQYHVWRUV�DUH�SRZHUIXOO\�UHGH¿QLQJ�KRZ�markets operate.Q Shared agendas. The third driver of this new era is found in the shared agendas of WKHVH�¿GXFLDU\�FDSLWDOLVWV��7KHLU�DJHQGDV�FDQ�be summarized as follows: maximize total UHWXUQV�WR�GHOLYHU�UHDO��LQÀDWLRQ�DGMXVWHG��current and future income over very long time horizons. Where their agendas differ is essentially in that each of these institutions KDV�D�XQLTXH�OLDELOLW\�SUR¿OH�WR�FRQVLGHU��,Q�WXUQ��¿GXFLDU\�FDSLWDOLVWV¶�QHHGV�DUH�QRW�always aligned with what agents (banks and EURNHUDJH�¿UPV�RU�IRU�SUR¿W�DVVHW�PDQDJHUV��DUH�DFFXVWRPHG�WR�RIIHULQJ��7R�PDQ\�¿GX-ciaries, “alpha” versus a market benchmark, trading opportunities, short-term forecasts, and competition with peers is not par-ticularly important. What really matters to these investors is a strategy that delivers the

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Beneficiaries 50 or 100 years from now will inherit not only the profits but also the positive and negative externalities of investments made today.

PERSPECTIVES ON THE LONG TERM!73

LQYHVWRU¶V�UHVRXUFHV�PD\�QRW�VXI¿FH�Corporate boards have become somewhat

cynical about the intentions of many owners of their shares. Holding periods of corporate equity continue to drop, and many buy-ers act more like renters than owners. This creates an unhealthy tension, which serves neither the issuer nor the shareholder. As XQLYHUVDO�RZQHUV��ODUJH�¿GXFLDULHV�VKRXOG�come to recognize that they are bound by liquidity constraints and trading costs in a long-term investment. This in turn sets up an opportunity for effective engagement with the issuer’s management and board and

negative externalities. Such recognition is GLI¿FXOW��DQG�WKH�¿QDQFLDO�VWDWHPHQWV�QHHG�WR�be augmented with supplemental informa-WLRQ��7KHUH�DUH�D�QXPEHU�RI�¿UPV�WKDW�DUH�offering research and ratings that provide such augmented analysis. The investment-management industry can seize the oppor-tunity to create products and services that VSHFL¿FDOO\�DGGUHVV�WKH�DJHQGDV�RI�¿GXFLDU\�capitalists. Fiduciary capitalists themselves need to embrace the natural advantages WKH\�KDYH�E\�HQJDJLQJ�ZLWK�LQYHVWHH�¿UPV�DV�ORQJ�WHUP�RZQHUV��+HUH��WRR��¿UPV�H[LVW�WKDW�can support this engagement where the end

Can Fiduciary Capitalists Be Trained?Professional education and credentialing, in the form of degrees, certifications, and charters, are among the hottest growth industries in business. Universities and professional organizations are quick to respond to significant new trends in job markets. In a world of growing interest in environmental, social, and governance investing, it is clear that a new crop of university programs and nonprofit credentialing organizations will spring up to meet the demand.

This is already the case. The New School’s Milano School of International Affairs and Urban Policy, in New York, offers a master of science in environmental policy and sustainability management, as well as a post-master’s certificate in sustainability strategies. Southern New Hampshire University offers a degree even closer to the theme of fiduciary capitalism, with its MBA program in sustainability and environmental compliance.

Certification programs are also on the rise. UCLA’s extension program offers a sustainability certificate program, as do Harvard University’s extension program and the MIT Sloan School of Management.

As important as these programs are in preparing the next generation, education and certifications alone will not be enough. The incentive systems that drive behavior must be realigned toward the values of fiduciary capitalism: long-term outcomes, accounting for externalities, and stakeholder focus. As investors redefine their objectives along these lines, the measurements of success will change, and, in turn, incentive systems can be reworked to reflect these values. In finance, the most powerful motivators tend to be dollars and cents, and it is fair to expect that educational and credentialing systems will adapt to changing needs quite quickly.

74!PERSPECTIVES ON THE LONG TERM

owners (including voters, in the case of sov-ereign funds) need more information to make reasonable judgments about their operations. This information should include total opera-tional costs, investment strategy and activi-WLHV��JRYHUQDQFH�SROLFLHV��DQG�¿QDQFLDO�GDWD��A change is needed in the framing of perfor-mance, away from comparing returns with PDUNHW�EHQFKPDUNV�DQG�LQ�IDYRU�RI�GH¿QLQJ�and comparing the organization’s returns in relation to its liabilities.$Q�HUD�RI�¿GXFLDU\�FDSLWDOLVP�FRXOG�IRFXV�

¿QDQFLDO�PDUNHWV�RQ�ORQJ�WHUP�RXWFRPHV�that better take into account positive and QHJDWLYH�H[WHUQDOLWLHV��7KH�W\SH�RI�¿GXFLDU\�capitalists described above have an excep-tional opportunity, as well as an obligation, to take leadership positions in this impor-tant work. At the same time, virtually any LQYHVWRU�FDQ�EHFRPH�D�¿GXFLDU\�FDSLWDOLVW��The steps involved include thoughtfully choosing an investment policy and strategy that promotes good corporate governance and environmental and social outcomes and avoids short-term tactics. There are many commingled investment vehicles offered to retail investors that have environmental, social, and governance strategies based on WKH�SULQFLSOHV�RI�¿GXFLDU\�FDSLWDOLVP�RXW-lined above. Q

should be welcomed by businesses looking for more stability and consistency from their VKDUHKROGHUV��8QGHU�¿GXFLDU\�FDSLWDOLVP��these corporate-management teams should be held accountable for long-term perfor-

mance and for the total impact, not simply WKH�ERWWRP�OLQH��RI�WKHLU�¿UPV¶�DFWLYLWLHV��7KLV�approach to the meaning of investment helps UHVWRUH�¿QDQFH�WR�LWV�RULJLQDO�DQG�LQWHQGHG�function as an enabler of economic and social progress.$V�OHDGHUV��ODUJH�¿GXFLDU\�LQYHVWRUV�

have a higher bar to clear for transparency, governance standards, and organizational sophistication. Today, too many institutional investors are secretive and do not disclose HQRXJK�DERXW�WKHLU�DFWLYLWLHV��7KHLU�EHQH¿FLDO�

INVESTING

1�-DPHV�3��+DZOH\�DQG�$QGUHZ�7��:LOOLDPV��The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic��¿UVW�HGLWLRQ��3KLODGHOSKLD��3$��8QLYHUVLW\�RI�3HQQV\OYDQLD�3UHVV�������2�)RU�PRUH�RQ�WKLV�DUJXPHQW�DQG�WR�DFFHVV�WKH�ORQJHU�DUWLFOH�XSRQ�ZKLFK�WKLV�SLHFH�LV�EDVHG��VHH�-RKQ�'��5RJHUV��³$�QHZ�HUD�RI�¿GXFLDU\�capitalism? Let’s hope so,” Financial Analysts Journal, 2014, Volume 70, Number 3, pp. 6–12.3 Hawley and Williams, The Rise of Fiduciary Capitalism. 4�$OIUHG�'��&KDQGOHU��-U���Scale and Scope: The Dynamics of Industrial Capitalism��¿UVW�HGLWLRQ��&DPEULGJH��0$��%HONQDS�3UHVV�������5 Larry Neal, The Rise of Financial Capitalism: International Capital Markets in the Age of Reason��¿UVW�HGLWLRQ��&DPEULGJH��8QLWHG�.LQJGRP��&DPEULGJH�8QLYHUVLW\�3UHVV�������6�5RELQ�*UHHQZRRG�DQG�'DYLG�6FKDUIVWHLQ��³7KH�JURZWK�RI�¿QDQFH�´�Journal of Economic Perspectives, 2013, Volume 27, Number 2, pp. 3–28.7�-RKQ�&��%RJOH��³%ODFN�0RQGD\�DQG�EODFN�VZDQV�´�Financial Analysts Journal, 2008, Volume 64, Number 2, pp. 30–40.8�7\OHU�$WNLQVRQ��'DYLG�/XWWUHOO��DQG�+DUYH\�5RVHQEOXP��³+RZ�EDG�ZDV�LW"�7KH�FRVWV�DQG�FRQVHTXHQFHV�RI�WKH�����±���¿QDQFLDO�FULVLV�´�)HGHUDO�5HVHUYH�%DQN�RI�'DOODV��6WDII�3DSHUV��1XPEHU�����-XO\�������GDOODVIHG�RUJ�9�/LDP�.HQQHG\��³7RS������3HQVLRQ�)XQGV��7KH�WKULIW\�WKRXVDQGV�´�Investment & Pensions Europe, September 2013, ipe.com. 10 Scott Patterson, Dark Pools: The Rise of the Machine Traders and the Rigging of the US Stock Market��¿UVW�HGLWLRQ��1HZ�<RUN��1<��&URZQ�Business, 2012. 11�5RJHU�8UZLQ��³3HQVLRQ�IXQGV�DV�XQLYHUVDO�RZQHUV��2SSRUWXQLW\�EHFNRQV�DQG�OHDGHUVKLS�FDOOV�´�Pension Funds, Governance and Compensation, 2011, Volume 4, Number 1, pp. 26–33.

Under fiduciary capitalism, these corporate-management teams should be held accountable for long-term performance and for the total impact, not simply the bottom line, of their firms’ activities.

PERSPECTIVES ON THE LONG TERM!75

In Singapore, long-termism is our national ethos. A willingness to forgo short-term grati-¿FDWLRQ�DQG�NHHS�IDLWK�ZLWK�WKH�IXQGDPHQWDOV�has served us well. It has been at the heart of our mission since the beginning of GIC, which was created out of a need to manage the pre-cious savings that were set aside from limited ¿QDQFLDO�UHVRXUFHV�LQ�WKH�HDUO\�\HDUV�RI�6LQJDSRUH��$V�'U��*RK�.HQJ�6ZHH��WKH�IRUPHU�deputy chairman who conceived the idea of GIC, put it then, “There is no real secret about the way in which most nations and individu-als grow rich. They must save a good part of WKHLU�LQFRPH��ZLVHO\�DQG�SUR¿WDEO\�LQYHVWHG��The more you save and the more wisely you invest, the faster you get rich.”*,&�ZDV�VHW�XS�LQ������WR�EHQH¿W�IURP�WKDW�

SHUVSHFWLYH��6SHFL¿FDOO\��*,&¶V�PLVVLRQ�LV�WR�invest for the long term so as to generate a JRRG�UHWXUQ�RYHU�DQG�DERYH�JOREDO�LQÀDWLRQ��Three decades later, GIC’s performance has LQGHHG�EHQH¿WHG�IURP�D�ORQJ�WHUP�SHUVSHF-tive. Our investment return gained substan-tially from the compounding of returns, the patient harvesting of long-term risk premi-ums, the countercyclical rebalancing of our portfolio, the ability to take advantage of VKRUW�WHUP�GLVORFDWLRQV�LQ�¿QDQFLDO�PDUNHWV��and our long-standing relationships with many investees, external fund managers, and other partners. Enduring the short-term uncertainty, and occasional short-term pain, has paid off.

Over the years, we have learned that it is actually not the time horizon that matters most, but rather the mind-set and discipline to consistently invest based on fundamen-tals. In particular, it is important to have the ability to assess value and maintain price GLVFLSOLQH�LQ�WKH�IDFH�RI�PDUNHW�ÀXFWXDWLRQV�and uncertainty. Having a long time horizon enhances this ability, especially in a world full of short-term investors. Professional inves-tors like to bank on skill rather than luck. At GIC, we add long-termism to our formula.

Lim Chow Kiat

Lim Chow Kiat is the group chief investment officer for GIC, Singapore’s sovereign-wealth fund. He joined the fund as a portfolio manager in 1993. Lim graduated from Nanyang Technological University and is a chartered financial analyst.

GIC’s Long-Term ViewFor Singapore’s sovereign-wealth fund, taking the long view is fundamental.

76!PERSPECTIVES ON THE LONG TERM

multiple channels and constantly assess to make sure they drive our decision processes.,Q�RXU�H[SHULHQFH��LW�LV�PRUH�GLI¿FXOW�

to do this in the area of liquid markets. Real-time market prices, while useful for some purposes, can severely interfere with the long-term investor’s discipline. The emotional Mr. Market, as master investor Benjamin Graham referred to the gyrating stock market, visits constantly to challenge that long-term philosophy. He tempts you to VHOO�D�SUR¿WDEOH�LQYHVWPHQW�ZLWK�D�TXLFN��EXW�often small) gain and pressures you to sell a losing investment, even when the long-term prospects are good (and indeed may have become better because of the lower price). Short-term price swings, rather than careful judgment on fundamentals, could end up dictating investment actions.

Even more insidious, knowing that Mr. Market is always available as a way to quickly and easily exit an investment can tempt you to relax the necessary due diligence. The false comfort of a liquid market may weaken the rigor required. It is therefore critical to create an investment process that forces you to stick to a value discipline, which includes assess-ment rigor, a target buy list, premortem analy-sis, rebalancing, and monitoring of portfolio turnover, among other measures. Having the mind-set to look beyond marked-to-market prices and instead at fundamental develop-ments in the assets has proved useful for this purpose. In equities, for example, it is critical to look beyond stock prices to actual business performance. When done well, this is a source of competitive advantage, given how rarely investors take such a disciplined approach. In recent years, we have also extended the advantage into the area of providing bespoke FDSLWDO�IRU�LQYHVWHHV���2XU�ORQJ�WHUP�DQG�ÀH[-ible capital has added to our opportunity set. 2QH�RI�WKH�PRVW�GLI¿FXOW�LQYHVWPHQW�GHFL-

sions to make is one that forces you to stand apart from the crowd. In fact, the largest

In theory, long-termism should give investors a big edge. The reality, however, is that even investors with explicit long-term PDQGDWHV�¿QG�LW�KDUG�WR�SXW�ORQJ�WHUPLVP�into practice. In our experience, the orga-nization’s entire “ecosystem” must have a long-term mind-set for it to work. Both investment and organizational practices need to be supportive. From clients to employees, IURP�IURQW�RI¿FH�WR�EDFN�RI¿FH��DQG�IURP�internal investors to external managers, we try to ensure that long-termism permeates our practices. We break the necessary dis-FLSOLQH�GRZQ�LQWR�¿YH�DUHDV��WKH�LQYHVWPHQW�philosophy, governance framework, invest-ment mandate, organizational practices, and communication.

1. INVESTMENT PHILOSOPHYAt the heart of GIC’s investment philosophy is our value discipline. We look for the com-pounding of fundamental value and opportu-nities in price-value divergence. Both require a long-term orientation. We are also mindful that long-term investing does not oblige us to buy and hold for long periods. The holding

period depends more on price and value than time. At the same time, while we obviously prefer market prices to move up quickly to UHÀHFW�RXU�DVVHVVHG�YDOXDWLRQV��ZH�DUH�SUH-pared to wait longer for the convergence than most investors.

Translating this philosophy into practice requires constant, concerted effort. We start with an articulation of our investment prin-ciples, which we vigorously promote through

The reality, however, is that even investors with explicit long-term mandates find it hard to put long-termism into practice.

INVESTING

PERSPECTIVES ON THE LONG TERM!77

ment practitioners who have shared their insights and networks in a variety of areas. For example, they gave us many useful ideas when we were working on a new investment framework two years ago. They also serve as experts in different domains and countries, rendering valuable help when we need addi-tional assessment.

3. INVESTMENT MANDATEWhether it is our client’s mandate to us or our mandate to external managers, we look for clarity. Clear statements on the return objec-tive, risk capacity, and scope of authority give IXQG�PDQDJHUV�WKH�FRQ¿GHQFH�WR�FRQVWUXFW�the best portfolios for delivering sustainable results. In particular, the appropriate time horizon for evaluation should be discussed and agreed on up front.

GIC manages Singapore’s reserves on behalf of the government. The government’s investment mandate to GIC is to preserve and enhance the international purchasing power of the funds over the long term. That directive is set out clearly in an investment-manage-ment agreement with GIC.

At the aggregate-portfolio level, the ���\HDU�UROOLQJ�UHDO�UDWH�RI�UHWXUQ²WKDW�LV��WKH�UHWXUQ�DERYH�JOREDO�LQÀDWLRQ²LV�WKH�key investment metric for GIC. Within the aggregate portfolio, we have a policy portfolio comprising several asset classes and an active portfolio made up of several active strate-gies. Each portfolio and strategy, at every level, has a clear set of objectives, including a return objective, risk capacity, and scope of authority. The minimum time horizon for

investment losses tend to arise from procy-clical decisions. “Marked to peers” can be a powerful (and damaging) psychological GULYHU�RI�VXFK�ÀDZHG�GHFLVLRQ�PDNLQJ��$V�the veteran investor Howard Marks puts it, “looking wrong” can destroy careers in most RUJDQL]DWLRQV��<HW�WKH�DELOLW\�WR�PDNH�WKRVH�GLI¿FXOW�GHFLVLRQV�LV�DQ�LPSRUWDQW�SDUW�RI�VXF-cessful investing. That is why a clear articu-lation of a value discipline and long-term orientation is so important.

2. GOVERNANCE FRAMEWORKA willingness to wait for the fundamentals to eventually play out does not mean there is no need for checks and balances. Assuring stakeholders that our portfolio is managed according to our mandate is essential. We have a “no surprises” policy, which means we are proactive in raising issues relating to risks and future challenges as a way of building DQG�PDLQWDLQLQJ�WKH�FRQ¿GHQFH�RI�RXU�FOLHQWV�and board of directors.

Our governance design also addresses potential agency problems through clear approval authority, regular reporting, and VHSDUDWLRQ�RI�FRQÀLFWLQJ�UROHV��$W�WKH�ERDUG�level, there are several committees to oversee such critical areas as investment strategies, risks, active management, audit, and HR practices. To ensure that we keep an eye on the really long horizon, we also have an advi-sory board that examines trends that span multiple decades, for example, new technolo-gies and demographics.,Q�DGGLWLRQ�WR�DYRLGLQJ�FRQÀLFWV�RI�

interest and ensuring that we look out for long-term developments, we pay particu-lar attention to equipping various levels of authority with the necessary resources. This is particularly important as GIC’s operations become more complex, requiring a greater in-depth understanding of issues. Hence, for D�QXPEHU�RI�\HDUV��ZH�KDYH�EHQH¿WHG�IURP�the services of several experienced invest-

To keep an eye on the really long horizon, we examine trends that span multiple decades, for example, new technologies and demographics.

78!PERSPECTIVES ON THE LONG TERM

we provide opportunities for exposure to dif-ferent parts of the business, and we increase UHVSRQVLELOLWLHV�WR�H[WHQG�WKH�FDUHHU�UXQZD\��in exiting, we do extensive succession prepa-ration and work to expand our alumni com-munity. Our human-resource practices focus on making GIC one of the best places in the world to practice long-term investing.

It sounds like simple common sense to say that successful long-term investors must be evaluated and rewarded based on their long-term performance. Although it is obvious, it is sometimes harder to implement than you might think. First, long-term investors are often in competition with other employ-ers that offer short-term incentives. While we believe that our total value proposition is superior, we must be careful not to stray too far from the typical employment package. This partly explains our practice of using mul-tiple time periods to measure performance. Doing so also helps to ensure that process goals or interim targets are also met and reduces the likelihood of someone becoming WRR�SDVVLYH�DIWHU�D�GLI¿FXOW�VWDUW��

In addition, effective performance-evalua-tion and reward systems must go beyond an extended evaluation horizon. Several other elements are necessary. Differentiating process from outcome, especially for interim results. When two investors produce the same outcome, it tells us little about who has done a better job. We ask what role process and luck played in the outcome. We also ask how much risk, and what sort of risk, was incurred. We EHOLHYH�\RX�FDQ�RQO\�FRQWURO�WKH�SURFHVV��the outcome is simply a consequence of that process.Evaluating performance at the total port-folio level rather than at the component level. There is often great temptation to focus on selective results. While that is useful for understanding the whys and hows, the over-all result is more important.

SHUIRUPDQFH�PHDVXUHPHQW�LV�¿YH�\HDUV��,Q�addition, we work hard to prepare expecta-tions for potential return paths. This is to avoid surprises and allow our investors to act in a long-term manner.

We would like to adopt the same approach with more of our external fund managers, including granting longer-term lockups in return for better performance and more IDYRUDEOH�WHUPV��8QIRUWXQDWHO\��ZH�DUH�RIWHQ�hampered by the fact that most other inves-tors do not have a similar time horizon. Their need and desire to have redemption liquidity PDNH�LW�GLI¿FXOW�IRU�XV�WR�VWUXFWXUH�ORQJ�WHUP�

mandates. This is an area where long-term asset owners could work together. In some cases, the reluctance of external fund manag-ers to provide ongoing process visibility also poses a problem, as long lockups require us to validate performance regularly.

4. ORGANIZATIONAL PRACTICESAs in any organization, the culture at GIC emanates from the top. Senior manage-ment takes every opportunity to advocate the importance of a long-term approach. Besides regular public articulations of this, we demonstrate resolve through our decisions in human-resource practices, resource alloca-tion, and other business areas. We want to ensure that there can be no doubt about our seriousness regarding these issues.

We emphasize long-termism in career development. In hiring, we consider mind-VHW�¿W�DQG�FDUHHU�UXQZD\��LQ�GHYHORSPHQW��

When two investors produce the same outcome, it tells us little about who has done a better job. We ask what role process and luck played.

INVESTING

PERSPECTIVES ON THE LONG TERM!79

“the long-term is but a series of short-terms” is extremely harmful. In our view, it is not WUXH²DW�OHDVW�QRW�IRU�LQYHVWLQJ��:H�ZRXOG�correct someone in our organization if he or she used that phrase or one like it. The drivers of short-term investment outcomes and the drivers of long-term investment outcomes are very different. In most cases, the former have to do with market emotions, while the latter have to do with fundamen-tal developments such as competitiveness. Think of Benjamin Graham’s “voting” and “weighing” machines. The wrong words can corrode, if not corrupt, our process.

Long-termism and a value orientation are at the heart of all we do, but to put these prin-ciples into practice requires constant vigilance and discipline. The entire ecosystem must share the same orientation, especially in the areas of investment philosophy, governance framework, investment mandate, organiza-tional practices, and communication. If we get those things right, however, we believe we will be rewarded with achieving the investment goals we have set for ourselves. Q

Our incentive scheme closely follows the output of the evaluation. If the evaluation is done well, the incentive will be right.

5. COMMUNICATION There are two aspects to highlight in this area. First, communication is important to surviving the long and often bumpy ride. Long-term investors not only need to get the investment call right but also need to PDLQWDLQ�VWDNHKROGHU�FRQ¿GHQFH�WKDW�WKH�investment strategy will most likely turn out right, even if current market prices indi-cate otherwise. At GIC, we try to make sure that the next-highest level in our organiza-tion understands the risks and challenges involved before embarking on an activity.

Second, we are conscious that nomencla-ture is destiny. The right word engenders the right attitude and the right behavior. From how a report is presented to how an invest-ment loss is explained and how a concept is described, we are meticulous about word choice, as well as how we deliver the mes-sage. For example, we avoid displaying only short-term performance results, especially at important forums. This is to prevent the perception that we emphasize short-term results. We avoid using a phrase such as “consistent results” so that our teams do not wrongly focus on quick bets and quar-terly gains. We prefer to say “sustainable UHVXOWV�´�:H�¿QG�WKDW�D�QLFH�VD\LQJ�VXFK�DV�

We are conscious that nomenclature is destiny.The wrong words can corrode, if not corrupt, our process.

80!PERSPECTIVES ON THE LONG TERM

In the predigital age, asset managers had an LQIRUPDWLRQ�DGYDQWDJH��7KH\�WHQGHG�WR�¿QG�RXW�WKLQJV�¿UVW��7KH\�MXVW�NQHZ�WKLQJV�WKDW�other people didn’t know. That advantage LV�JRQH��7RGD\��PRUH�LQIRUPDWLRQ²PXFK�PRUH²LV�DYDLODEOH�LQ�JHQHUDO��DQG�LW�LV�DYDLO-able to everyone, professionals and amateurs alike, simultaneously. Access to data is no longer a differentiator. Today, if you are an asset manager, your advantage needs to be how you process the data. And part of that is to take a longer-term view.

When you take a longer-term view, you’re QRW�VR�PXFK�ORRNLQJ�DW�GDWD�SRLQWV��<RX¶UH�ORRNLQJ�DW�WUHQGV��<RX¶UH�ORRNLQJ�DW�WKH�VKDSH�of the information, rather than the informa-tion itself. That’s a different perspective, and one where you can actually start to see the patterns and make sense of the individual GDWD�SRLQWV��<RX¶UH�ORRNLQJ�IRU�GDWD�WKDW�FRQ-¿UPV�RU�XQGHUPLQHV�\RXU�ORQJ�WHUP�LGHDV��,W�can provide a structural advantage by giving you a view of risk that other people might not see. I’m thinking of environmental, social, and governance risks, as well as other big disruptive and systemic risks. In addition, by WDNLQJ�D�ORQJHU�YLHZ��\RX�FDQ�¿QG�WKH�LQWHUDF-tions and correlations among investment positions that others might not be conscious

INVESTING / Euan Munro

Euan Munro is CEO of Aviva Investors and a member of the group executive committee of Aviva. Munro holds a bachelor of engineering in physics and electronics from the University of Edinburgh and is a fellow of the Institute and Faculty of Actuaries.

Getting Beyond The Data PointIn the age of ubiquitous information, long-term thinking provides a structural advantage to fund managers—and helps them contribute greater value to society.

PERSPECTIVES ON THE LONG TERM!81

$Q�LPSRUWDQW�EHQH¿W�RI�ORQJ�WHUP�LQYHVW-ing is that it leads to better-quality decisions, more risk-aware decisions. At a societal level, the more long-term thinking there is, the more funding will go to those compa-QLHV�WKDW�ZLOO�JHQHUDWH�ZLGHU�VRFLDO�EHQH¿WV��For example, if you imagine an investment choice between two resource companies, one that is operating to a high ethical standard and another that falls short of doing so, then IRU�DQ�HTXLYDOHQW�OHYHO�RI�SUR¿WDELOLW\�DQG�SUR¿W�JURZWK��WKH�VHFRQG�FRPSDQ\�KDV�D�ORW�more open-ended risk. A sensible long-term investor will tend to invest in companies that are better behaved simply because they’re less risky.

A big problem is that most professional investors and managers have not been trained to look at data in this way. In both cases, education tends to be quantitative DQG�QXPEHUV�GULYHQ��)RU�FKDUWHUHG�¿QDQFLDO�analysts, there’s a lot of emphasis on the accounts and quarterly results. The training WHDFKHV�SHRSOH�WR�ORRN�DW�¿QDQFLDO�PHWULFV�and, on that basis, make investment deci-sions. They are not trained to look at the wider context and consider societal and governance risks. The training does not focus on the details and implications of the busi-ness strategy. Real businesses are run by real people who have their own needs, who can EH�JUHHG\�DQG�DEXVH�SRZHU�RU�EH�VHOÀHVV�DQG�devoted to the greater good of their organiza-tions. The existence of an appropriate gover-nance framework that avoids moral hazard should be a major consideration in investing.

This hugely important human element is

of because they haven’t looked at the larger shape of the information.

Once you learn to do that, a lot of things FKDQJH��<RX�QR�ORQJHU�QHHG�WR�EH�UHOLDQW�RQ�TXDUWHUO\�UHSRUWV��<RX�GR�EHWWHU�DQDO\VLV��<RX�WKLQN�DERXW�LW�ORQJHU��<RX�GRQ¶W�HYHQ�QHHG�DV�many investment ideas, because you can have WKH�FRQ¿GHQFH�WR�WDNH�ELJJHU�VWDNHV�DQG�KROG�WKHP�ORQJHU��<RX�EHFRPH�PRUH�HQJDJHG�ZLWK�the companies you invest in. And you can think more deeply about portfolio construc-tion, stress testing the entire portfolio for pos-sible events and performing better analysis on the long-term risks and opportunities of individual holdings.

But to be successful, you have to learn to look at risk in a whole new way. For one, environmental, social, and governance LVVXHV²DOO�WKH�WKLQJV�VKRUWHU�WHUP�SOD\-HUV�GRQ¶W�ZRUU\�DERXW²EHFRPH�FULWLFDOO\�important. If a company has suspect employ-ment practices, such as using child labor in overseas factories or exploiting illegal immi-grants, those practices could be bolstering SUR¿WV�LQ�WKH�VKRUW�WHUP��EXW�LQ�WKH�ORQJHU�term, they create an open-ended risk. This could manifest itself in a consumer boycott and or some other serious business disrup-tion down the line.

A NEW VIEW OF RISK6LPLODUO\��LI�D�FRPSDQ\�LV�XVLQJ�¿QDQFLDO�sophistry to avoid paying taxes or if it has terrible environmental practices, it might be boosting performance in the short term but dramatically increasing risk in the long term. These are the sorts of issues that have the potential not just to torpedo a company’s share price over a week or a month but also to GHVWUR\�LWV�EXVLQHVV�PRGHO��<RX�RQO\�WHQG�WR�worry about them, however, if you’re thinking longer term. A high-frequency trader who is EX\LQJ�D�VWRFN�IRU�¿YH�PLQXWHV�EHIRUH�WXUQLQJ�it around will not give much thought to these kinds of potential catastrophes.

A sensible long-term investor will tend to invest in companies that are better behaved simply because they’re less risky.

82!PERSPECTIVES ON THE LONG TERM

cope with that. Once a company gets locked into that quarterly cycle, it leads to a series of bad outcomes. If you’ve trained your investors to watch the target number and then you miss it, they’ll sell. If, on the other hand, you have shared your business vision with your inves-tors, they would not and should not be sup-SRUWLYH�RI�PDQDJHPHQW�VWRSSLQJ�D�SUR¿WDEOH�investment, say, in a new subsidiary, simply to meet quarterly guidance.

Similarly, in the asset-management busi-ness, we’ve trained our clients to assess us by benchmarking performance every quarter or even every month. The reality is that whatever is measured is what gets managed to. Fund managers have strong incentives to try to beat their benchmarks, sometimes to the extent that they forget about the goals of the original asset owner.

Another factor driving short-termism in asset management is the noise that's FUHDWHG�E\�WKH�PHGLD��8OWLPDWHO\��WKLV�LV�a commercial business. Interestingly, we don’t make money, particularly, from great investment performance. Our clients do. We make money from the accumulation of assets. The more assets we manage, the more PRQH\�ZH�PDNH��8VXDOO\��WKHUH¶V�D�FRQQHF-tion between those two things, but it’s not perfect. If you’re seen as a successful fund manager, you will accumulate more assets, so the public image of whether you’re good is really important. And if you look at how the media normally assesses fund managers, few outlets are considering ten years of perfor-mance history. Most of the time, the media tends to cover the person who was calling for the market to go up this year or the manager who was in the right stock this quarter. Gen-erally, the things that get the most coverage are short-term phenomena.

Meanwhile, our clients have to act on the information they have. If they see my team underperforming for three quarters in a row, I can remind them that I have a long-term

IUHTXHQWO\�XQGHUSOD\HG��<RX�KDYH�WR�XQGHU-stand the business plan of the companies you’re considering investing in, but you also have to be able to judge the talent and charac-ter of the people you’re relying on to execute that plan. Is the business model sustainable? Are the people in place capable of executing that plan? Those questions of human judg-ment tend not to get discussed as much in the formal training in my profession. Some of the best training in my career has come from SHRSOH�RXWVLGH�WKH�LQGXVWU\²IRU�LQVWDQFH��from lawyers, who have shown me how to ask questions that get to the truth, or from conductors, who have shown me how to get a collection of talented individuals to work together as a whole.

Investee companies could help the situation by providing a broader range of information. We’ve been early advocates of integrated reporting, which encourages companies to give us detailed information on environment, social, and governance issues

in a narrative format so that we can make more informed decisions. If you are going to hold an investment for years, rather than weeks or months, you need to understand WKDW�EURDGHU�FRQWH[W��D�PRUH�FRPSOHWH�QDUUD-tive helps. We need less data and more rich discussion of the business. What is the com-pany’s overall ethos and business strategy? Where is it going?

We don’t need to have those reports every TXDUWHU��-XVW�UHSRUW�VHPLDQQXDOO\��:H�FRXOG�

INVESTING

We need less data and more rich discussion of the business. What is the company’s overall ethos and business strategy? Where is it going?

PERSPECTIVES ON THE LONG TERM!83

est rates were to rise, it would probably be broadly helpful for some of our insurance picks, and we could add one of those stocks to the portfolio. The hope is that the two ideas would both work in the long term but be complementary in the short term.

The goal is to address the risk of short-term volatility while keeping the portfolio invested

in long-term ideas. One important thing the asset-management industry needs to do to help itself is to elevate portfolio construction to the same level as idea generation. That just has not happened in our industry. It’s been DOO�DERXW�WKH�LGHD�JHQHUDWLRQ²DQG�RIWHQ�TXLWH�short-term idea generation.

There are many advantages of long-term thinking. They are usually discussed with UHVSHFW�WR�YDULRXV�VWDNHKROGHUV²VKDUHKROG-ers, employees, suppliers, customers, local communities, and society at large. It is stating the obvious to conclude that these are all important. But I believe that learning to think longer term, to view the shape of the information rather than being blinded by data points, enables better investment GHFLVLRQV��,W�VXSSRUWV�XV�LQ�IXO¿OOLQJ�WKH�foundational role of asset managers, which LV�WR�HQVXUH�WKDW�FDSLWDO�¿QGV�LWV�ZD\�WR�WKRVH�investments that provide the greatest utility to the economy by delivering sustainable long-term returns. If we can do that, we will keep our clients happy, and we will be comfortable in our skin as valuable members of society. Q

strategy and that this is just a short-term aberration, but that is probably not going to EH�HQRXJK��8QIRUWXQDWHO\��WKHUH�LV�D�NQRZO-edge imbalance in the industry that is hard to overcome. Clients know a lot less about capital markets and our investment pro-cesses than we do, so they have to make their judgment on good fund managers versus bad fund managers using what they believe is the most objective information at hand. For many clients, that is the quarterly fund ranking. This is a powerful incentive for us to focus on short-term performance metrics.

BUILDING A BETTER PORTFOLIOThere is another way for fund managers to encourage a longer-term perspective, and that is to spend a lot of time focusing on portfolio construction. It’s a way of invest-ing for the long term while managing risk for the short term. What I mean by that is taking steps to make sure that your invest-ment portfolios are not going to be blasted out of shape by one or two decisions going against you. In our case, we have built a portfolio with a two- or three-year invest-ment view. But we stress test it to make sure that over any quarter, if any kind of big event happens, we have a sense of how the portfolio would perform. We consider possible extreme events such as all out war in the Middle East, banks melting down in Europe, or interest rates being raised in the 8QLWHG�6WDWHV²HYHQWV�WKDW�ZRXOG�VWUHVV�WKH�markets.

We assess how the portfolio would per-form under those conditions and what we could do to mitigate potential volatility. For example, if you wanted to include in your portfolio an idea for an investment with great long-term potential, but it was exposed to rising interest rates, you would look across your inventory of other investment ideas for the industries or businesses that would EHQH¿W�IURP�LQWHUHVW�UDWHV�JRLQJ�XS��,I�LQWHU-

Fund managers can encourage a longer-term perspective by focusing on portfolio construction. It’s a way of investing for the long term while managing risk for the short term.

84!PERSPECTIVES ON THE LONG TERM

Reporting for The 21st CenturyTraditional company reports do a good job of tracking finances and tangible assets. That’s not nearly enough for businesses today.

Doing business in an increasingly volatile, uncertain, complex, and ambiguous world poses profoundly different challenges from those of the past. Globalization, rapid innova-tion in technology, and demographic swings are driving a level of change that our business structures have not yet caught up with. Over the past 30 years, for example, there has been a fundamental shift in macroeconomic value to a point where more than 80 percent of the market value of companies now lies in intan-gible assets.1 <HW�PDQ\�DFFRXQWLQJ�SUDFWLFHV�DQG�SURFHVVHV�GR�QRW�UHÀHFW�WKLV�VKLIW��7KLV�new set of circumstances urgently requires a change in behavior to focus more on long-WHUP�YDOXH�FUHDWLRQ��$V�0HUY\Q�.LQJ�DQG�Leigh Roberts put it in their book Integrate: Doing Business in the 21st Century �-XWD��Company, September 2013), “It’s time for business as unusual.”

In this article, I will set out my view of how integrated reporting, a new corporate-report-ing initiative, can help companies address the information needs of both investors and business decision makers within this changed dynamic. With a focus on long-term business success and integrated thinking, integrated reporting helps organizations tell their story LQ�WKHLU�RZQ�ZRUGV��DGGUHVVLQJ�WKH�VSHFL¿F�concerns of long-term investors. In addition,

INVESTING / Charles Tilley

Charles Tilley is the chief executive of the Chartered Institute of Management Accountants (CIMA). Before joining CIMA in 2001, he served as group finance director of the investment bank Hambros, and then held the same position at Granville Baird. He also spent 14 years at KPMG, becoming a partner in 1986.

PERSPECTIVES ON THE LONG TERM!85

Q Make the allocation RI�FDSLWDO�PRUH�HI¿-cient and productive through improvements in the quality of information available to SURYLGHUV�RI�¿QDQFLDO�FDSLWDO�Q Identify and communicate the full range RI�¿QDQFLDO�DQG�QRQ¿QDQFLDO�IDFWRUV�WKDW�materially affect the ability of an organization to create value over the short, medium, and long term.Q Recognize the importance of a broad UDQJH�RI�FDSLWDO��¿QDQFLDO��PDQXIDFWXUHG��intellectual, human, social and relationship, and natural) to provide a thorough under-standing of the organization’s business model.Q Support integrated thinking, enabling business decision makers to focus on value creation over the long term.

I believe that integrated reporting is an initiative whose time has come, and this view is supported by the six largest global account-ing networks. In a report2 commissioned by the B-20, the business forum that advises G-20 governments, the networks endorsed integrated reporting as an important innova-tion that will make corporate reporting more conducive to long-term investment.

The linkage between integrated reporting and long-term investment has been demon-strated by George Serafeim at Harvard Busi-ness School.3�+H�VWXGLHG�PRUH�WKDQ�������86�¿UPV�WR�¿QG�WKH�FRUUHODWLRQ�EHWZHHQ�WKH�XVH�of integrated reporting and the time horizon of the investor bases they attracted over the period 2002 to 2010. His research included QRW�RQO\�WKRVH�¿UPV�WKDW�SUHSDUHG�LQWHJUDWHG�

integrated reporting can aid value creation by providing a framework for business decision makers to better understand material inter-relationships among the elements of their business model in the context of the external business environment.

The integrated-reporting initiative is spear-headed by the International Integrated Report-ing Council (IIRC). The IIRC’s long-term vision is for integrated thinking to become standard business practice in both the public and private sectors, and integrated reporting to become the predominant mode for companies to use in reporting results to stakeholders.

An integrated report may be prepared either as a stand-alone report or be included as a distinguishable, prominent, and accessible part of another report or communication. It is essentially a narrative report, supported by WUDGLWLRQDO�¿QDQFLDO�UHSRUWV��WKDW�LQWHJUDWHV�DOO�the factors material to an understanding of the value created by an organization and its future potential in a clear and concise manner.

Numerous national and international reporting regulations exist, and in the short term, integrated reporting is not going to replace these requirements. But in my opin-ion, there is no other framework that operates across the breadth of the activities within a business and its external context to the same extent as integrated reporting. It provides an umbrella framework under which other reporting requirements can be accommodat-HG��)RU�LQVWDQFH��WKH������8.�6WUDWHJLF�5HSRUW�and Directors’ Report is consistent with the principles underlying integrated reporting, WKH�(8�GLUHFWLYH�RQ�GLVFORVXUH�RI�QRQ¿QDQFLDO�information recognizes that this legislation is moving toward integrated reporting, and inte-grated reporting is mandatory in South Africa.

The IIRC anticipates that, given time, organizations will stop producing numerous, disconnected, and static communications and replace these with an integrated report that would accomplish the following:

Integrated reporting can aid value creation by providing a framework for business decision makers to better understand material interrelationships among the elements of their business model.

86!PERSPECTIVES ON THE LONG TERM

and water use, emissions, and waste. Novo 1RUGLVN¶V�DLP�LV�WR�HQVXUH�ORQJ�WHUP�SUR¿W-ability by mitigating risks and minimizing negative impacts from business activities, and to enhance the positive contributions to soci-ety from the company’s global operations.

Evidence from the IIRC’s pilot program of more than 100 organizations using integrated UHSRUWLQJ�VKRZV�WKDW�WKH�EHQH¿WV�DUH�QRW�restricted to improved relationships with long-term investors. There are also internal EHQH¿WV��)RU�H[DPSOH��EHFDXVH�LQWHJUDWHG�reporting requires them to consider the various types of capital they deploy, many companies have reassessed the way they work across their business, as well as the way they use technology to integrate information and, ultimately, change the way they report results to reinforce the connectivity of information. In this way, organizations have strength-ened and made more transparent the causal relationships that exist among strategy, the business model, and value creation.

Research5 undertaken by the Chartered Institute of Management Accountants and Tomorrow’s Company (a London-based international think tank) emphasizes the value of integrated reporting beyond its role as a reporting framework. First, it can help an organization to better understand and connect the disparate sources and drivers of long-term value to enable better strategy for-mulation and decision making. In addition, it provides a synthesis of how value is created, helping to win trust and secure reputation by encouraging better relationships with inves-tors, employees, and other stakeholders.

A DEEPER UNDERSTANDING OF THE BUSINESS MODELIntegrated reporting combines an emphasis on conciseness and future orientation with a strong focus on strategy, the business model, and value creation. Making the connectivity of information and the interdependencies of

UHSRUWV�EXW�DOVR�WKRVH�WKDW�UHÀHFWHG�WKH�SULQ-ciples of integrated reporting in their full range of published reports. Serafeim found that the greater the degree of integration included ZLWKLQ�¿UPV¶�UHSRUWLQJ�WKH�PRUH�ORQJ�WHUP�their investor bases were. More research will be needed on the impact of this longer-term investor base, but I contend that this research further supports the linkage between inte-grated reporting and a greater ability to focus capital on the long term.

In an article in the Harvard Business Review,4 Dominic Barton and Mark Wiseman argue that investors have an obligation to end what they see as the plague of short-termism. They call for providers of capital to alter the lens through which they view investment to focus more capital on the long term. One of the practical changes they suggest is for these

major asset owners to demand long-term met-rics from companies as a step toward changing the investor-management conversation.

I believe that there is also a complementary need for companies to focus their reporting on the long term. For instance, Novo Nordisk, the Denmark-based global healthcare company, has for a number of years published long-term targets. Its latest long-term targets include the XVXDO�SUR¿W��VDOHV��PDUJLQ��DQG�FDVK�PHWULFV�but also targets that, although not directly ¿QDQFLDO��VXSSRUW�ORQJ�WHUP�¿QDQFLDO�SHU-formance. These fall into two groups: social targets, which include employee motivation DQG�VHQLRU�PDQDJHPHQW�WHDP�GLYHUVLW\��DQG�environmental targets, which include energy

INVESTING

Research further supports the linkage between integrated reporting and a greater ability to focus capital on the long term.

PERSPECTIVES ON THE LONG TERM!87

chase the output? Do they make repeat pur-chases or recommendations to other potential customers? And does the output generate brand loyalty? Outcomes can be both internal (employee morale, revenue) and external (customer satisfaction, tax payments) as well as either positive or negative.

It is this need to identify and describe outcomes, particularly external outcomes, that drives an organization to consider the kinds of capital it uses beyond just those that it owns or controls. And it is this broadening of the range of factors to be taken into account in business decision making that underlies integrated reporting and provides its more long-term foundation.

BUSINESS-MODEL ANALYSISThe need to understand the business model exists at both the tactical and strategic levels within an organization. At the tactical level, the focus is on an almost forensic analysis of the mechanics of the business model. At the heart of this detailed analysis, which spans the organiza-tion, are the imperatives of improved customer experience, cost leadership, minimizing envi-ronmental impact, and the effect of competitor activity. In an era of increasing volatility and rapid change, the goal is to maximize long-term value creation by optimizing opportunities and minimizing value-limiting factors.

At the tactical level, the organization’s business model needs to be viewed through D�YDULHW\�RI�OHQVHV��7KHVH�LQFOXGH�FDVK�ÀRZV��SUR¿W�JHQHUDWLRQ��GHSHQGHQFH�RQ�H[WHUQDO�relationships, technological reliance, opera-

various forms of capital transparent enables D�PRUH�HI¿FLHQW�DQG�SURGXFWLYH�DOORFDWLRQ�RI�capital, both among businesses and within businesses. Integrated reporting applies principles and concepts that are focused on EULQJLQJ�JUHDWHU�FRKHVLRQ�DQG�HI¿FLHQF\�WR�WKH�reporting process, and promotes integrated thinking as a way of breaking down internal silos, reducing duplication, and driving posi-tive behaviors for long-term success.

But what does it take to truly develop inte-grated thinking? I contend that it begins with a thorough understanding of the business model that lies at the heart of the organi-zation’s value-creation process. Such an understanding is essential for identifying both risks and opportunities. The International ,QWHJUDWHG�5HSRUWLQJ�)UDPHZRUN�GH¿QHV�DQ�organization’s business model as its “system of transforming inputs, through its business activities, into outputs and outcomes that aim WR�IXO¿OO�WKH�RUJDQL]DWLRQ¶V�VWUDWHJLF�SULRULWLHV�and create value over the short, medium, and long term.” 6

So what does the IIRC mean by inputs, business activities, outputs, and outcomes?Q Inputs are the resources, relationships, and other forms of capital that the organization depends upon or which provide a source of differentiation. Integrated reporting describes those inputs that are material to understand-ing the robustness of the business model.Q Business activities are what the organi-zation does to create value for itself and its stakeholders (including society).Q An integrated report�LGHQWL¿HV�DQ�RUJD-nization’s key products and services as well as any by-products, waste, or emissions that require discussion, based on how material they are to an understanding of the robust-ness of the business model.Q Actually producing something or making a service available is not necessarily a long-WHUP�YDOXH�FUHDWLQJ�DFWLYLW\��ZKDW�LV�FUXFLDO�LV�the outcome that results. Do customers pur-

A thorough understanding of the business model that lies at the heart of the organization’s value-creation process is essential for identifying both risks and opportunities.

88!PERSPECTIVES ON THE LONG TERM

model must underpin the boardroom conver-sation, to help it determine if the activities of the organization are effectively aligned with WKH�RYHUDOO�VWUDWHJ\��WR�KHOS�LW�LGHQWLI\�ULVNV��and to help focus discussions of strategy.

LOOKING TO THE FUTURE,�¿UPO\�EHOLHYH�WKDW�D�WKRURXJK�XQGHUVWDQG-ing of the business model supports better integrated thinking and decision making, leading to better governance, better per-formance management, and better report-LQJ²ZKDW�,¶G�FDOO�EHWWHU�EXVLQHVV��+RZHYHU��I recognize that more work needs to be done to convince many boardrooms that integrated reporting, underpinned by integrated think-ing, will help them run their businesses more successfully in the long term. The Chartered Institute of Management Accountants will seek to establish this case by asking the fol-lowing questions:Q What conversations are boards currently having about the business model?Q To what extent is this supporting a longer-term perspective?Q What are the challenges in trying to understand and promote a common view of the business model?Q What information do organizations need to understand the business model?

Answering these questions will also help us to develop the tools and frameworks that companies need to run their businesses sus-tainably. I look forward to sharing the initial ¿QGLQJV�RI�WKLV�UHVHDUFK�LQ�������Q

tional processes, and the impact on the orga-nization’s reputation and risk exposure.

These lenses should be focused on the long term. However, pressure persists on business OHDGHUV�WR�GHOLYHU�¿QDQFLDO�UHVXOWV�LQ�WKH�VKRUW�term. According to a survey commissioned E\�0F.LQVH\�DQG�WKH�&DQDGD�3HQVLRQ�3ODQ�Investment Board,7 out of more than 1,000 executives representing the full range of industries and company sizes, nearly 80 per-cent of respondents said that the time frame in which they felt the most pressure to deliver ¿QDQFLDO�UHVXOWV�ZDV�WZR�\HDUV�RU�OHVV�

Nevertheless, the importance of reputation risk was shown by a recent global Chartered Global Management Accountant survey8 of PRUH�WKDQ�������¿QDQFH�OHDGHUV��FRQGXFWHG�E\�WKH�$PHULFDQ�,QVWLWXWH�RI�&HUWL¿HG�3XEOLF�Accountants and the Chartered Institute of Management Accountants. More than three-quarters of those surveyed indicated that their FRPSDQ\�ZDV�SUHSDUHG�WR�ORVH�SUR¿W�LQ�WKH�short term for the sake of protecting long-term reputation, and the same number is putting more focus on reputational risk now than in previous years.

At the strategic level, the analysis is driven by the board’s need to understand how their organization creates value through its chosen business model and the risks it faces. Airmic’s 2011 study9 of more than 20 major corporate IDLOXUHV�LGHQWL¿HV�D�QXPEHU�RI�FDVHV�LQ�ZKLFK�the board’s failure to understand the business model contributed to a major crisis. I believe that a thorough understanding of the business

INVESTING

1 “Ocean Tomo announces 2010 results of annual study of intangible asset market value,” April 4, 2011, prweb.com.2 Unlocking investment in infrastructure: Is current accounting reporting a barrier?, B-20 panel of six international accounting networks, -XQH�������WKHLLUF�RUJ�3 George Serafeim, Integrated Reporting and Investor Clientele, Harvard Business School, 2014, hbs.edu.4 Dominic Barton and Mark Wiseman, “Focusing capital on the long term,” Harvard Business Review��-DQXDU\±)HEUXDU\�������SS����±����KEU�RUJ�5 7RPRUURZ¶V�%XVLQHVV�6XFFHVV, Chartered Institute of Management Accountants and Tomorrow’s Company, in association with the ,QWHUQDWLRQDO�,QWHJUDWHG�5HSRUWLQJ�&RXQFLO��-XO\������6 The International <IR> Framework, International Integrated Reporting Council, December 2013, theiirc.org.7�³6KRUW�WHUPLVP��,QVLJKWV�IURP�EXVLQHVV�OHDGHUV�´�VXUYH\�FRPPLVVLRQHG�E\�0F.LQVH\��&RPSDQ\�DQG�WKH�&DQDGD�3HQVLRQ�3ODQ�,QYHVWPHQW�%RDUG��-DQXDU\�������IFOW�RUJ�8�³&RPSDQLHV�SXW�UHSXWDWLRQ�EHIRUH�SUR¿W��VD\V�JOREDO�VXUYH\�´�&KDUWHUHG�,QVWLWXWH�RI�0DQDJHPHQW�$FFRXQWDQWV��������FLPDJOREDO�FRP�9 Roads to Ruin: A study of major risk events: Their origins, impact, and implications��&DVV�%XVLQHVV�6FKRRO��&LW\�8QLYHUVLW\�/RQGRQ��DQG�Airmic, 2011, airmic.com.

PERSPECTIVES ON THE LONG TERM!89

To facilitate the adoption of integrated-reporting principles, the International Integrated Reporting Council (IIRC) launched its formal framework in December 2013.1 It presents steps for making sure the integrated report provides insight into the resources and relationships that are used and affected by an organization, referred to as “the capitals” by the IIRC (exhibit).

The capitals are stocks of value that are increased, decreased, or transformed by the organization’s business activities. The extent to which the organization can capture value for itself governs the financial returns to the providers of financial capital. However, the organization should also be viewed through the lens of other stakeholders and society at large. The nonfinancial elements of the capitals, including manufactured, intellectual, human, social and relationship, and natural, which are nonetheless material to an organization’s ability to create value for itself, should also be reported in an integrated report.

Following its recent pilot program with 140 leading businesses, institutional investors, and public-sector organizations including Gold Fields, Microsoft, National Australia Bank, Natura, PepsiCo, and The Crown Estate, the IIRC has announced a number of specific steps aimed at increasing adoption of integrated reporting, as well as a separate technology initiative. Financial capital: the pool of funds available to an organizationManufactured capital: manmade physical objects, such as buildings, equipment, and infrastructure

Intellectual capital: knowledge-based intangibles, such as intellectual property, knowledge, systems, and proceduresHuman capital: the competencies, capabilities, and experience of employees, such as motivation to innovate, alignment with governance framework, understanding of strategy, and loyaltySocial and relationship capital: the relationships within and among communities, groups of stakeholders, and other networks and their common values, including brand and reputational intangiblesNatural capital: all renewable and nonrenewable environmental resources and processes such as air, water, land, minerals, biodiversity, and ecosystem health

A Framework for Integrated Reporting

Social and relationship

capital

Natural capital

Intellectual capital

Human capital

Financial capital

Manufactured capital

1“The International <IR> Framework released with business and investor support,” International Integrated Reporting Council, December 2013, theiirc.org.

90!PERSPECTIVES ON THE LONG TERM

A few years ago, I was invited to be a speaker at a conference for the Chinese investment-management community. The Chinese mar-kets, like emerging markets all over the world, are volatile. So, the thought goes, the best way to make money is to trade frequently, lest you end up holding the short straw. The confer-HQFH�RUJDQL]HUV�NQHZ�WKDW�P\�¿UP��+LOOKRXVH�Capital, had both very low turnover and excel-lent performance. They were surprised to see these two things exist in tandem. My speech was billed as, “How to make money despite being a long-term investor.”

Other Chinese investors often tell me they would like to be long term too, but they can’t DIIRUG�WR�EHFDXVH�RI�WKHLU�¿GXFLDU\�GXW\�WR�make money for clients. I sympathize with this sentiment because there is some truth in it. Great long-term investments are simple LQ�WKHRU\�EXW�GLI¿FXOW�LQ�H[HFXWLRQ�EHFDXVH�they will undoubtedly test your patience and resolve, especially in the face of potentially steep interim losses. Another necessary condition for the successful execution of a long-term strategy is the backing of invest-ment partners who remain patient and reso-lute alongside you. Fund managers who are forced to continually make money or defend short-term results can never truly take a long-term outlook.

INVESTING / Lei Zhang

Lei Zhang is the founder and CEO of Hillhouse Capital Management Group. Hillhouse manages approximately $16 billion for endowments, foundations, sovereign-wealth funds, and family offices. Zhang is the vice chairman of the board at Renmin University of China and serves on several councils at Yale University. He earned a BA from Renmin University and an MA and MBA from Yale.

A Single Ladle from A Flowing Stream Long-term investing requires patience and discipline from all players in the ecosystem.

PERSPECTIVES ON THE LONG TERM!91

sidered more premium than multinational counterparts like Tide.

Many entrepreneurs in our portfolio share similar stories. Tencent intentionally under-monetized its early social network, QQ, for many years in order to focus on consumer experience. Hengan, one of China’s biggest consumer companies, emphasized a slower-growing feminine-products business line over a fast-growing tissue-paper division because tissue brands are less defendable over time. In its start-up years, Baidu cut its only money-

making division, the SMS-advertising busi-ness, in order to focus solely on search.

One of Hillhouse’s guiding principles is a phrase borrowed from the 18th-century Chinese classic novel, Dream of the Red Chamber. The phrase translates roughly into, ³2XW�RI�D�ÀRZLQJ�VWUHDP��,�QHHG�RQO\�D�VLQJOH�ladle of water.” In China, most entrepre-neurs suffer from the problem of having too much choice rather than too little. They are surrounded by innumerable “opportunities” that offer the promise of a quick buck. The willingness of the exceptional entrepreneurs WR�IRFXV�DQG�GHOD\�JUDWL¿FDWLRQ�LQ�WKH�ZKROH-hearted, almost ascetic pursuit of a greater long-term mission is what inspires me to keep investing.

This principle applies to Hillhouse as well. Investing in equity, the residual value of a business, over the course of several years or decades forces decision making in the face RI�VWUDWHJLF�DPELJXLW\�DQG�UHTXLUHV�D�VSHFL¿F�mind-set. A few years ago, one of my analysts FDPH�WR�PH�ZLWK�D�VWUXFWXUHG�¿QDQFH�GHDO�

A FOCUS ON ENTREPRENEURSHaving partners who are long term them-selves gives me freedom to focus on what I love, which is working with exceptional entrepreneurs to build businesses that optimize for the next ten years rather than the next quarter. The founders of Blue Moon, Luo Qiuping and Pan Dong, exemplify this LGHD��:H�¿UVW�PHW�%OXH�0RRQ�LQ�������$W�the time, Blue Moon was a leader in liquid hand soap. The company was able to grow organically and was not looking for inves-tors. We were intrigued by the entrepreneurs and kept in touch, often sharing our research on the global household/personal-care industry. In 2008, the company had a small 5'�EUHDNWKURXJK�ZLWK�D�QHZ�W\SH�RI�OLTXLG�clothing detergent. At the time, multina-tionals had a big presence in China in the powder-detergent market. Liquid detergents were a premium product and the Chinese were thought to be too cost-conscious for this concept.

We believed Blue Moon had a window of opportunity to seize the liquid-detergent market in China. Globally, this market stood at nearly $20 billion, and it seemed inevitable to us that the rise of the Chinese consumer would add to this number. As a result of these discussions, Blue Moon decided to go full steam into liquid detergents, spending heavi-ly on marketing, distribution, and manufac-turing build-out. The Blue Moon founders turned a small enterprise that made steady, KDQGVRPH�SUR¿WV�LQWR�D�ORVV�PDNLQJ�HQWHU-prise with the potential to become a multi-billion-dollar powerhouse. Hillhouse was an enthusiastic participant in this decision and EHFDPH�RQH�RI�%OXH�0RRQ¶V�RQO\�VLJQL¿FDQW�external shareholders, investing in 2010. The company became an early pioneer in China in creating products synonymous with quality, a strategy that has allowed it to become not only the largest player in the liquid-detergent segment but also to build a brand that is con-

In China, most entrepreneurs suffer from the problem of having too much choice rather than too little.

92!PERSPECTIVES ON THE LONG TERM

to leverage Tencent’s social-network data and capabilities to provide better service and products to its customers. Some people believe that investing is a zero-sum game, that you can only win if someone else loses. I think long-term investing is positive sum, that HYHU\RQH�LQ�WKH�JDPH�EHQH¿WV���

Hillhouse is an active participant in strate-gic decisions, but we are never activists. We would never try to force a decision on a com-pany. We’re never hostile. If we are ever in a situation in which we are completely at odds with the entrepreneur, then we have probably made a bad judgment. We certainly have had our fair share of mistakes and battle scars. In these situations, we walk away and take our losses. Life is short and we want to spend quality time with quality people.

KNOWLEDGE AS A STRATEGIC ASSETWe are in many ways like a university, focused on the pursuit of truth through research. When a team member has a good idea, he or she can spend months, even years, learning as much as possible about the business, sector, or geography without the SUHVVXUH�RI�¿QGLQJ�D�FRPPHUFLDO�DSSOLFDWLRQ��We once looked at the evolution of retail over the past hundred years across both West-ern and Asian markets to understand why certain retail formats were stronger in some markets than others. As a result of these sorts of multiyear efforts, we have the con-viction to pursue our own ideas and are not beholden to the “spot market” of available deals or companies. 7KLV�SHUVSHFWLYH�ZRXOG�EH�GLI¿FXOW�LI�RXU�

research activities were geared toward try-ing to meet a deadline for a deal, or trying to understand volatility when it hits. If our research leads to an attractive investment or helps us incubate a new business, then great. If not, we are happy to wait until the right time comes. Maybe there will never be a right WLPH��DQG�WKDW�LV�2.��ZH�HQFRXUDJH�UHVHDUFK�

that would have generated a 25 to 30 percent internal rate of return within a few months. I turned it down. I didn’t want my organization to spend time on marginal ideas that distract from the challenging work of honing long-term judgment, no matter how attractive these opportunities might sound.

The intersection of great ideas and excep-WLRQDO�SHRSOH�LV��E\�GH¿QLWLRQ��UDUH��:KHQ�ZH�¿QG�JUHDW�HQWUHSUHQHXUV��ZH�GR�DOO�WKDW�ZH�can to help them build their companies. This is not completely altruistic. For one thing, KHOSLQJ�D�FRPSDQ\�GH¿QH�VWUDWHJLF�GLUHFWLRQ�reduces our investment risk. Second, help-ing our existing entrepreneurs extend their franchise value by reaching new markets and deepening competitive moats means we can stay invested for much longer. We are lucky to have three or four new investment ideas a

year, so reducing or eliminating the need to “change horses” drives compounded returns over the long term.

For example, we’ve worked on a number of initiatives over the years with Tencent, our YHU\�¿UVW�SRUWIROLR�FRPSDQ\��:H�LQWURGXFHG�Tencent to MNC, Indonesia’s largest media conglomerate (with whom we have been invested for many years). Together, the three of us formed a joint venture in Indonesia to grow Tencent’s mobile-chat service, WeChat, in Indonesia. We helped form a strategic SDUWQHUVKLS�EHWZHHQ�7HQFHQW�DQG�-'�FRP��China’s largest B2C retailer. As part of this partnership, Tencent merged its e-commerce DVVHWV�LQWR�-'�FRP��DQG�-'�FRP�ZLOO�EH�DEOH�

INVESTING

We have the conviction to pursue our own ideas and are not beholden to the “spot market” of available deals or companies.

PERSPECTIVES ON THE LONG TERM!93

relevant to what we do or what our limited partners are interested in.

Long-term investing cannot exist in a YDFXXP��LW�QHHGV�DQ�HFRV\VWHP�IRU�VXSSRUW��Even though the short-term-trading mentali-ty of the Chinese market has provided us with some interesting buying opportunities, it is ultimately a risk to the entire system. Entre-preneurs cannot reach their full potential without staunch support from investors, and investors like us cannot provide that support without the backing of our clients.

In China, I have organized a group of equity investors to share thoughts about fundamental investing. I support start-up fund managers who share Hillhouse’s long-term philosophy and help them get their businesses off the ground. People think this LV�SUHWW\�VWUDQJH��HYHQ�D�IHZ�RI�P\�RZQ�WHDP�have questions about why I am so eager to develop potential competitors. I see it as expanding the entire long-term ecosystem and enlarging the pie for everyone. I deeply believe that long-term investing is a positive-sum game. I also have a soft spot for all true entrepreneurs, and the investing business, especially in a market as dynamic as China’s, is certainly one that calls for plenty of entre-preneurial spirit and determination.

Who you are depends on who is around you. Hillhouse’s fundamental reason for exis-tence is to help quality people build quality companies, and we must do all that we can to work with our partners to create an ecosys-tem to support this mission. Q

simply to indulge our curiosity and get closer to the truth.

Long-term-oriented research allows you to have conviction when others don’t, and partnering with like-minded limited partners gives you the freedom to act on this convic-tion. This is why we are stage agnostic and invest in everything from private growth companies to public companies. We invest in companies that have minimal or no earnings, or in companies that go from positive earn-ings to negative earnings with our advice and encouragement. We hold on to companies without pressure to sell and help them com-pound in value. We invest not only in China, but across Asia and the rest of the world and SXW�FDSLWDO�WR�ZRUN�ZKHUHYHU�ZH�¿QG�H[FHS-tional entrepreneurs. 2XU�FOLHQWV�DOORZ�XV�WKH�ÀH[LELOLW\�WR�FDOO�

capital during market depressions and return capital when we feel there are not enough opportunities to deploy it.

For example, during the depths of the ¿QDQFLDO�FULVLV��,�JRW�H[WUHPHO\�H[FLWHG�E\�WKH�valuations of our existing portfolio compa-nies. I called my clients and said I wanted to double down on the fantastic businesses we owned, which we thought were fundamentally sound but priced like they were going to fail. Shortly after Lehman Brothers collapsed, Hillhouse took in one of the largest capital LQÀRZV�LQ�LWV�\RXQJ�KLVWRU\��

Hillhouse has performed well by any mea-sure over the past ten years, but this has not precluded us from having periods of under-performance. We can hold onto (or buy more of) companies with strong long-term funda-mentals and poor-performing stock prices because our investors understand what we are doing and give us the leeway to execute. We don’t ask our entrepreneurs about quar-WHUO\�HDUQLQJV��WKLV�VRUW�RI�LQIRUPDWLRQ�LV�QRW�

Long-term investing cannot exist in a vacuum; it needs an ecosystem for support.

94!PERSPECTIVES ON THE LONG TERM

Building a Business-Owner Mind-SetIt’s time to start investing based on long-term fundamentals rather than short-term volatility.

By definition, long-term investors have a stake in the long-term health of the economy. Measured over years and decades, their performance is tied to the innovation, produc-tivity, and growth of the companies in which they invest and, more broadly, to economic prosperity as it grows over time. These inves-tors have good reason to focus on the business fundamentals of the companies and projects they invest in, on important policy choices, and on the broader fundamentals of the economy itself. In a word, long-term investors need to be builders.

Short-term investors have a different frame of mind. Fundamentally, they are trad-ers. Their business depends on the hourly, weekly, or quarterly price swings of a stock, which can be completely disconnected from the underlying condition of companies or the VWDWH�RI�WKH�HFRQRP\��3UR¿W�FDQ�EH�JHQHUDWHG�in good or bad times, based on the short-term movements of interchangeable stocks. ,Q�WRGD\¶V�¿QDQFLDO�V\VWHP��WKH�SUREOHP�LV�

WKDW�WRR�PDQ\²IDU�WRR�PDQ\²LQYHVWRUV�KDYH�become traders who treat companies like commodities. But companies are not com-

INVESTING / Michael Sabia

Michael Sabia is the president and CEO of Caisse de dépôt et placement du Québec, which manages public and private pension funds in Québec. Previously, he was chief executive of BCE, Canada’s largest telecommunications company. Sabia earned a BA from the University of Toronto and an MPhil from Yale University.

PERSPECTIVES ON THE LONG TERM!95

7KH�¿UVW�SDUW�RI�WKH�DQVZHU�LV�NQRZOHGJH²deep knowledge. Business owners are not VDWLV¿HG�ZLWK�VHFRQGKDQG�UHSRUWV�RU�SHULRGLF�UHYLHZV�RI�3/�VWDWHPHQWV��WKH\�NQRZ�DQG�understand the fundamentals of the company or asset they invest in. They are intimately familiar with its culture, people, operations, and strengths and weaknesses. They under-stand the industry and know the competition. And they have a deep sense–impervious to VKRUW�WHUP�PDUNHW�ÀXFWXDWLRQV�RU�ÀLJKWV�RI�fancy–of their business’s intrinsic value.

This expertise is not passive or detached: business owners engage with management. They exercise their judgment and make con-sidered decisions based on rigorous analysis. They have a clear idea of where their business is heading.

Finally, business owners display loyalty to their company, but not at any cost. In return, they expect performance and work hard, with management, to achieve it. They are independent minded. While they are aware of what others may think, they are ready to look beyond it. They are prepared to make tough GHFLVLRQV�DQG�ZRUN�WKURXJK�GLI¿FXOW�WLPHV�

Of course, all this serves as a metaphor. Institutional investors are not business own-ers, and they should not actually start running companies. That said, we do believe the busi-ness-owner mind-set is a useful inspiration for the successful pursuit of long-term investing.

INSTILLING THE MIND-SETFor 50 years, Caisse de dépôt et placement du Québec (la Caisse) has been manag-ing public-pension and insurance funds.

modities. They play critical roles in allocating resources, determining levels of investment, fostering innovation, creating jobs, and contributing to productivity and prosperity. :KHQ�ZH�WUHDW�FRPSDQLHV�DV�FRPPRGLWLHV²that is, when we trade them rather than invest LQ�WKHP²ZH�UXQ�WKH�ULVN�RI�XQGHUPLQLQJ�WKH�long-term growth prospects of our economy.

Why? Because as traders press for short-term performance, CEOs have no choice but to focus their strategies on quarterly perfor-mance, to the detriment of long-term invest-ment plans that might be costly in the near term but often enhance growth potential. Spread across the breadth of our economy, this dynamic contributes to the sort of slow growth we are experiencing globally today.

Many share this concern. In fact, the importance of investing with a long-term perspective is now much discussed, as the Focusing Capital on the Long Term initiative demonstrates. The beginnings of a consensus for change seem to be taking shape.

This being said, the truth is that long-term LQYHVWLQJ�LV�GLI¿FXOW��(VSHFLDOO\�WRGD\��ZKHQ�information circles the planet in minutes, the pressure for short-term results has never EHHQ�JUHDWHU��DQG�¿QDQFLDO�LQWHUPHGLDULHV�have become omnipresent, increasing com-plexity, risk, and costs. 7KHVH�DUH�VLJQL¿FDQW�KHDGZLQGV��7R�

navigate such an environment successfully, long-term investors require independent governance, a renewed focus on culture and process, sound risk management, and, of course, the right people. Above all, they must return to the roots of asset ownership: invest-ing in the real economy with a business-owner mind-set.

INVESTING LIKE AN OWNERWhat does it mean to invest with a business-owner mind-set? What are the distinctive traits of business owners? What distinguishes them from traders?

In today’s financial system, the problem is that too many—far too many—investors have become traders who treat companies like commodities.

96!PERSPECTIVES ON THE LONG TERM

of benchmark deviation, or the wisdom of crowds. Deep knowledge is a prerequisite for investors willing to take more concentrated positions instead of the usual practice of hedging their bets and diversifying across the investment landscape.

This focus on deep knowledge has become a cornerstone of our investment approach.

InfrastructureInfrastructure is a natural asset class for the long-term investor. Typically illiquid, long term in nature, and resistant to easy bench-marking, infrastructure-investment decisions must rely on a rigorous understanding of intrinsic value and risk.

As with our real-estate portfolio, applying a business-owner mind-set to our infrastruc-ture investments requires us to answer a number of questions: Is the project economi-cally important and, hence, is it viable for the long term? Do we understand it well? Is the expertise available to manage it through good times and bad? What operational improve-ments can we make? La Caisse aims to provide unambiguous and durable responses to these questions, as we normally approach infrastructure acquisitions with little or no consideration for the date of resale.

Public MarketsWe have also decided to expand the business-owner mind-set to our public-markets team. This represented a radical departure from the status quo.

In 2013, we launched a high-quality global equities portfolio built on the core principles outlined earlier. The portfolio is worth CAD 25 billion, concentrated in about 70 compa-nies, with an annual turnover rate of about 10 percent. Stocks are selected on the basis of proprietary fundamental research, which also serves as an essential risk-management tool.

Crucially, it is a benchmark-agnostic portfolio: while its performance is measured

:H�KDYH�PRUH�WKDQ�&$'�����ELOOLRQ��86'�189 billion) in assets under management, more than 90 percent of which is managed internally. Coming out of the 2008–09 crisis, la Caisse began working to instill a business-owner mind-set throughout the organization. Here’s how that mind-set plays out across various asset classes.

Real EstateAt la Caisse, we do not simply invest in real estate: we own and operate it. With more than CAD 40 billion in assets, our Ivanhoé Cambridge subsidiary has become one of the leading operators of real estate in the world, with 1,700 employees and properties in Asia, Europe, Latin America, and North America.

When making investment decisions, Ivanhoé Cambridge is not focused on how to dispose of acquired properties in a three- to ¿YH�\HDU�KRUL]RQ�RU�RQ�WKH�¿QDQFLDO�HQJL-neering underlying the transaction. Instead, it analyzes the tenant base, potential long-term disruptions, and opportunities for

operational improvements to the property’s management.

Developing such a deep understand-LQJ�RI�DVVHWV²LQFOXGLQJ�DW�WKH�RSHUDWLRQDO�OHYHO²SUHVHQWV�D�QXPEHU�RI�DGYDQWDJHV��It provides a rigorous and independent sense of the value and potential of an asset, which increases resilience in the face of turmoil. Fundamental research is also, we believe, a better way to manage risk than a simple reliance on technical tools, tracking

INVESTING

Fundamental research is a better way to manage risk than a simple reliance on technical tools, tracking of benchmark deviation, or the wisdom of crowds.

PERSPECTIVES ON THE LONG TERM!97

THE ELEMENTS OF A LONG-TERM CULTUREAll institutions hoping to keep their focus on the long term face challenges. Public markets in particular are awash with distractions. While no one is completely immune to the anxieties of market volatility, holding stead-fast to a few principles and practices may help to navigate turbulent seas.

Independent GovernanceInvestors hoping to remain committed to their principles must be able to withstand pressure from government, other institutions, and public opinion.

In practice, this requires three things: truly independent governance, shielded from interference from political actors and outside LQWHUHVWV��DQ�DELOLW\�WR�UHVLVW�SXEOLF�FULWLFLVP�RU�LPSDWLHQW�FDOOV�IRU�D�FKDQJH�LQ�GLUHFWLRQ��and freedom to set compensation policies adapted to the marketplace. A number of guidelines exist to achieve these objectives, and they should be adopted, in letter and spirit, by all investors serious about making and maintaining their own decisions.

Talent )RU�DQ\�LQVWLWXWLRQ��WKH�¿UVW�SULRULW\�LV�¿QG-ing individuals who understand its philoso-phy and values and who are willing and able to further them. Compensation structure and processes help to align individual incentives with institutional objectives but cannot serve as a magical cure for fundamental differ-ences of perspective.

For la Caisse, the combination of a busi-ness-owner mind-set and a focus on long-term risk assessment has meant hiring people with broad horizons, diverse backgrounds, operational experience, and a willingness to engage with the management of portfolio companies. Our search for experienced busi-ness operators has often led us far beyond the WUDGLWLRQDO�UHFUXLWPHQW�SRRO�RI�WKH�¿QDQFLDO�

against an index over a long horizon, it is not built around a benchmark and is not expected to track one. This is a near-complete reversal of our previous strategy. Adopting a business-owner mind-set has meant letting go of indexes.

We are now in the process of expanding this approach to other major equities port-folio. By the end of 2015, CAD 50 billion of assets will have been shifted away from our previous, benchmark-driven strategy to one that, we are convinced, will deliver far more durable results.

Even though equity portfolios don’t always allow for the same kind of engagement as real estate or infrastructure, we’ve tried to import the same overarching principles: deep research, a focus on intrinsic value as opposed to benchmarks, fundamental risk assessment, and resilience in the pursuit of long-term objectives.

Private EquityThe business-owner mind-set also appears ideally suited to private-equity investments. Importing the principles outlined above to la Caisse’s current and future private-equity operations represents the next frontier in our plan.

Once again, the point is not to operate companies directly. Instead, we will be striv-ing, along with our partners, to be an active (but not activist) investor, not bound to any VSHFL¿F�EHQFKPDUN��VHHNLQJ�RQO\�WR�LQYHVW�in businesses we believe in. These may be companies that are performing well but are underpriced, or they may be companies in which we see opportunities for sustainable performance improvement.

La Caisse is developing this level of engagement and ownership one transaction DW�D�WLPH²RFFDVLRQDOO\�WDNLQJ�ERDUG�VHDWV��making recommendations, and using our LQÀXHQFH²DV�ZH�OHDUQ�IURP�SDVW�VXFFHVVHV�and failures.

98!PERSPECTIVES ON THE LONG TERM

been an important ingredient in our move to a more collective approach to investment decision making. Our new process relies on the value of debate as the best way to get the real issues on the table. For example, we don’t have an investment committee. We have an investment-risk committee. The distinction is important because it implies that in a discus-sion of any investment proposal, we expect a debate between our investment and risk teams. We regard this as a key part of develop-ing the deep convictions we need to take large positions and hold them for the longer term.

With that same goal in mind, we are also trying to adopt a more strategic approach to investment decision making. Every year, we ask each asset-class team to develop and present to our board a four-year plan that LGHQWL¿HV�LWV�LQYHVWPHQW�SULRULWLHV�DQG�ZKHUH�it intends to take its “business” over the com-ing period. Throughout the year, individual investment decisions are evaluated against those four-year priorities.

CompensationIndispensable to our strategy is an ability to pay our investment professionals on a com-mercially competitive basis. Without it, we would not have access to the talent we need. That being said, how we pay our people is as important as how much. Four years ago, we put in place a new compensation program built on a number of principles that aim to support our long-term business-owner mind-set:Q We offer pay for performance over a four-year rolling period.Q Individual, team, and la Caisse–wide per-formance counts for everyone.Q Risk management is everyone’s responsi-bility.Q We try to make investment decisions as if ZH�ZHUH�LQYHVWLQJ�RXU�RZQ�PRQH\²WR�WKDW�end, as an example, our senior executives are required to invest more than half of their annual bonus in la Caisse’s portfolio.

industry. We have hired engineers, geologists, and executives with operating experience in mining, consumer products, and IT, among many other areas. We want people who have a clear understanding of how value is created LQ�D�VHFWRU²EHFDXVH�ZH�EHOLHYH�GXUDEOH�YDOXH�is created through excellent operations, not ¿QDQFLDO�HQJLQHHULQJ�

Culture and ProcessWhat is an organization’s culture? In our minds, ultimately, it is how work gets done. It is the fabric that brings together the indi-vidual skills of our people. Building a culture that resists the temptation to follow the crowd and seek immediate results has been one of our toughest challenges. We still have a long way to go.

We are trying to build an institutional culture that values the kind of knowledge, independence, and patience that lead to deep convictions. That means striving to under-stand companies and assets as deeply as a business owner, truly engaging with the com-

panies we invest in, and weighing fundamen-tal, long-term risks.

When making investment decisions, we place a great deal of emphasis on the pool-ing of knowledge across the organization to marshal our best insights. This has meant breaking down the silos that have histori-cally separated one asset class from another and investing in information-management systems that facilitate collaboration.

This deliberate pooling of knowledge has

Building a culture that resists the temptation to follow the crowd and seek immediate results has been one of our toughest challenges.

INVESTING

PERSPECTIVES ON THE LONG TERM!99

Why is all this important? Beyond catch-phrases and good intentions, is there funda-mental value in long-term investing with a business-owner mind-set?

We deeply believe so. Long-term investing creates a virtuous

circle that improves risk-adjusted returns over time. It encourages corporations to adopt longer-term objectives, invest in innovation, and focus on building superior longer-term performance. At scale, it can stabilize and improve capital markets. And it helps to reduce the noise and distractions that often lead markets to irrational turbu-lence. In a fast-paced world, taking a step back makes sense.

As large, global investors, our ability to meet our clients’ long-term expectations depends on markets that ultimately reward responsible and creative decisions.

We believe all institutions that have the ability to break free from the tyranny of short-termism should consider the broadly VKDUHG�EHQH¿WV�RI�LQYHVWLQJ�IRU�WKH�ORQJ�term. If we all chase the market based on one another’s movements, we are really all just chasing our tails. Surely, we can do better than that. Q

RiskEqually important is a robust assessment of ULVN��6KRXOG�ZH�EH�FRQFHUQHG�DERXW�ÀXF-tuations in asset value, deviations from a benchmark, or permanent loss of capital? 6KRXOG�ZH�IRFXV�RQ�¿QDQFLDO�IDFWRUV��EURDGHU�determinants of risk, or both?

La Caisse has adopted a pragmatic approach: risk is assessed from a number of perspectives, each providing its own insights. But our priorities have shifted.

We are now mainly concerned about deep risk and permanent loss of capital, and we JLYH�H[WHQVLYH�FRQVLGHUDWLRQ�WR�ERWK�¿QDQFLDO�DQG�QRQ¿QDQFLDO�ULVN�IDFWRUV��/LNH�EXVLQHVV�judgment, risk management is both an art and a science. To that end, we are working to pool expertise and encourage open (and at times vigorous) debate.

While we continue to track volatility using all available tools, la Caisse no longer sees this measure as the be all and end all of risk man-DJHPHQW��2XU�IRFXV�LV�¿UPO\�SODFHG�RQ�GHHS�research and stress testing the performance of both individual assets and our overall portfolio. We are gradually moving away from certain tools, like VaR, that often obscure more than they reveal.7R�SXW�LW�VLPSO\��WKH�FULWHULD�WKDW�¿JXUH�LQWR�

an evaluation of risk over a 30-day window are of limited relevance to a 30-year invest-ment horizon. When thinking about value over PXOWLSOH�\HDUV�RU�GHFDGHV��QHDU�WHUP�ÀXFWXD-tions fade in importance next to core strengths and weaknesses, fundamental movements in demography and technology, and the stability of economic and political systems.

When thinking about value over multiple years or decades, near-term fluctuations fade in importance next to core strengths and weaknesses.

100!PERSPECTIVES ON THE LONG TERM

INVESTING / James P. Gorman

James P. Gorman is chairman and CEO of Morgan Stanley. He joined the firm in 2006 as president and COO of global wealth management, and was then copresident and cohead of corporate strategy. He previously held a succession of executive positions at Merrill Lynch, was a senior partner of McKinsey & Company, and an attorney in Melbourne, Australia. Gorman earned a BA and law degree from the University of Melbourne and an MBA from Columbia University.

The strengths of well-functioning global capital markets include speed, scale, and HI¿FLHQF\�LQ�FDSLWDO�PRELOL]DWLRQ�DQG�DOORFD-WLRQ²DWWULEXWHV�WKDW��ZKLOH�SRVLWLYH��VRPH-times foster short-termism. Mobility and interconnectedness increase the speed of transacting and communicating but render it easier for decision makers to be caught in the welter of immediate concerns. Now, PRUH�WKDQ�HYHU��FRUSRUDWH�DQG�¿QDQFLDO�leaders must clearly focus on the longer term in their strategic planning and investment decisions.

The following facts illustrate why this reori-entation is vital: In 1950, the world’s popula-WLRQ�ZDV�����ELOOLRQ��WRGD\��LW�H[FHHGV���ELOOLRQ��and by 2050 it will have grown to more than 9 billion.1 Much of this change will occur in major cities already grappling with issues created by dense population and high growth rates. Rapid urbanization, scarcity of clean water, inadequate nutrition, lack of hous-ing, and periodic disease outbreak not only multiply the challenges to providing basic life necessities, they also affect economic growth and social prosperity.

The Long-Term Imperative for Financial Institutions Finding innovative solutions to the challenges of the future will require stable capital markets and intermediaries.

PERSPECTIVES ON THE LONG TERM!101

telecommunication pioneers and Internet visionaries have accessed markets to build companies that change how members of societies communicate, learn, and interact. The prospective challenge we now face is to channel capital to the innovators who will turn ideas into companies addressing our greatest social concerns, while also provid-ing attractive risk-adjusted returns to capital providers. Private capital must be a part of EXLOGLQJ�D�VXVWDLQDEOH�ZRUOG��LQ�IDFW��ZLWKRXW�such capital, sustainability is unsustainable.

Morgan Stanley is committed to building a long-term sustainable economy that yields VRFLDO�EHQH¿W��$V�D�JOREDO�¿QDQFLDO�LQVWLWX-tion, this means we must do several things.

First, we must ensure that we have a sus-tainable business model that is not only resilient but also contributes to a sound global financial system. This is a central WHQHW�IRU�DQ\�OHDGHU�RI�D�¿QDQFLDO�LQVWLWX-tion. Living up to this tenet demands a sound business, in all regards, from capital reserves to risk-management procedures, corporate culture, and a commitment to our communi-ties and environment.:LWKLQ�¿QDQFLDO�VHUYLFHV��WKH�SDVW�¿YH�\HDUV�

KDYH�EHHQ�D�MRXUQH\��WKH\�KDYH�UHTXLUHG�GLI-¿FXOW�GHFLVLRQV�WR�PDQDJH�LQFUHDVLQJO\�FRP-plex regulatory and operating environments. 7KDQNIXOO\��VLJQL¿FDQW�SURJUHVV�KDV�EHHQ�made in establishing institutional strength and stability. For example, at Morgan Stanley, liquidity at the time of the crisis was approxi-mately $81 billion against an aggregate EDODQFH�VKHHW�RI������WULOOLRQ��LW�LV�QRZ������

These trends will alter the complexion of our economies and societies. To provide a prosperous, sustainable world for a larger population, we must develop markets less prone to structural upheaval and more capable of funding projects and companies WKDW�SURYLGH�ZLGHVSUHDG��VXVWDLQDEOH�EHQH¿WV�and operate with respect for the planet. This means thinking today about how to plan for, manage, and adapt to tomorrow’s realities, DQG�UHTXLUHV�D�UHVLOLHQW�¿QDQFLDO�LQIUDVWUXF-ture prepared to thrive under new conditions.

Many consider issues like climate change, poverty, and global health to be largely the purview of governments, philanthropies, and QRQSUR¿WV��(DFK�RI�WKRVH�VHFWRUV�QR�GRXEW�plays a critical role in setting policy, provid-ing essential services, and supporting innova-tive approaches to address market failures. The private sector, however, has a crucial role to play by deploying innovative technologies and developing new business models to meet changing social and economic circumstances. Companies that focus on these challenges ZLOO�EH�EHVW�SRVLWLRQHG�IRU�ORQJ�WHUP�JURZWK��indeed, attempts to quantify the value of sustainable business opportunities yield esti-mates ranging from $3 trillion to $10 trillion annually by 2050, potentially 4.5 percent of the world’s projected gross domestic product.2 %\�KDUQHVVLQJ�WKH�VSHHG��VFDOH��DQG�HI¿FLHQF\�of global capital markets, private sector-led solutions can proliferate and present the best chance of addressing challenges ahead. This FRQFHSW�LV�FHQWUDO�WR�¿QDQFLDO�VHUYLFHV�

For centuries, the prudent allocation and deployment of capital has been essential for economic growth and development. In the early 19th century, railroad and steel entre-preneurs built entire industries with the VXSSRUW�RI�¿QDQFH��,Q�WKH�FHQWXU\�VLQFH��WKH�development of deep, liquid public securities markets accelerated and democratized capi-tal formation, enabling fresh business mod-els that drove new industries. More recently,

By harnessing the speed, scale, and efficiency of global capital markets, private sector-led solutions can proliferate.

102!PERSPECTIVES ON THE LONG TERM

building programs that expand opportunities for sustainable investing, the Institute fur-thers capital’s role in achieving sustainable economic growth.

Many of our clients actively think about sustainability as a key business driver as well. For example, when we help a company like Tesla with its initial public offering, the implications extend far beyond the immedi-ate capital raised.4 Tesla generated excite-ment among car enthusiasts by creating a fully electric vehicle with high performance standards and sleek design. Fueled by critical policy decisions, technological advances, and customer choice, a robust electric vehicle PDUNHW�FDQ�EH�¿QDQFLDOO\�UHZDUGLQJ�ZKLOH�contributing to reducing carbon emissions and illustrating how to pair attractive, risk-adjusted returns with positive social and environmental outcomes.5

Similarly, the rapidly growing market for JUHHQ�ERQGV��ZKLFK�¿QDQFH�HQYLURQPHQWDOO\�sustainable projects) demonstrates how ¿QDQFLDO�VHUYLFHV�¿UPV�FDQ�SDUWQHU�ZLWK� clients to allocate capital resources to long-term instruments. In 2014, green bond issuance exceeded $30 billion, up from just $1 billion a few years ago.6�8QLOHYHU��IRU�H[DPSOH��SDUWQHUHG�ZLWK�RXU�¿UP�WR�LVVXH�LWV�¿UVW�HYHU�JUHHQ�ERQG�ODVW�\HDU��SURFHHGV�ZLOO�help to reduce greenhouse-gas emissions, improve water usage and waste output, and LQFUHDVH�HQHUJ\�HI¿FLHQF\�DW�QHZ�DQG�H[LVWLQJ�facilities. In the municipal sector, we sup-ported the Commonwealth of Massachusetts in issuing the largest tax-exempt green bond, FDSLWDO�WKDW�ZLOO�¿QDQFH�JUHHQ�LQIUDVWUXFWXUH�projects across the state. These are fun-damental and laudable changes in clients’ DSSURDFK�WR�¿QDQFH�

Our individual clients also are eager to make long-term sustainability a central part of their portfolios. In fact, sustainable, responsible and impact investing assets now account for more than one out of every

billion against a balance sheet of $815 billion. Our leverage was 30 times and is now 12, while our capital has grown from $35 billion to $73 billion.3 These were necessary changes.

The pre-crisis Morgan Stanley was a high-velocity, volatile collection of businesses that had fewer checks and balances. Today, WKH�¿UP�KDV�EHFRPH�D�GHOLEHUDWH��GH�ULVNHG��balanced, and integrated enterprise focused on client advisory and execution rather than proprietary activity. We invested in businesses like wealth management, which provide ballast and predictability, while maintaining a leading investment bank and institutional securities franchise that offer ¿UVW�FODVV�VHUYLFH�WR�RXU�FOLHQWV��7KHVH�PHD-sures, coupled with the actions taken by our regulators and industry peers, contribute to the improved resilience and soundness of the ¿QDQFLDO�V\VWHP�

Second, we must integrate a long-term perspective in evaluating investment opportunities for our firm and partner with clients that do the same. Informa-tion may cause markets to move rapidly, but prudent stewards of capital should also recognize long-term trends and their cumula-tive effects. We increasingly consider factors such as natural-resource scarcity and climate change in our daily processes of evaluation and review. Far from being just an exercise in ULVN�PLWLJDWLRQ��WKLV�UHSUHVHQWV�D�VLJQL¿FDQW�growth opportunity for those companies that successfully anticipate the products, strate-gies, and services that the future will demand.

For these reasons, we established the Morgan Stanley Institute for Sustainable Investing. Its mandate is to maximize capi-tal’s impact in supporting a more sustainable IXWXUH�E\�EXLOGLQJ�VFDODEOH�¿QDQFLDO�VROXWLRQV�WKDW�VHHN�WR�GHOLYHU�FRPSHWLWLYH�¿QDQFLDO�returns, while promoting positive environ-mental and social impact. Through product innovation, thought leadership, and capacity-

INVESTING

PERSPECTIVES ON THE LONG TERM!103

healthcare facilities near their homes. Such efforts create cohesive, vibrant communities that are the basis for economic well-being.

In addition, our Institute for Sustainable Investing helps develop the next generation of long-term-oriented business leaders. In SDUWQHUVKLS�ZLWK�,16($'�DQG�WKH�.HOORJJ�School of Management at Northwestern 8QLYHUVLW\��ZH�UHFHQWO\�FKDOOHQJHG�WHDPV�of graduate students from around the world to demonstrate how investing can go hand-in-hand with positive social impact. Teams from 39 universities in ten countries responded with remarkable innovation and enthusiasm. The winning idea proposed transitioning ecologically damaged land to poplar forests that would decontaminate the soil and could be sold for commercial use. These efforts illustrate that combining human capital with global perspective and reach produces results that are tangible, effective, and attractive to all constituents.

The course of history has proven that rigor-ous analysis, underpinned by thoughtfulness, determination, and collaboration, can solve seemingly intractable problems. The social and environmental challenges posed by popu-lation growth and resource scarcity are sig-QL¿FDQW�DQG�DFFHOHUDWLQJ��)LQDQFLDO�VHUYLFHV�will play a particularly vital role in providing the capital necessary for the private sector to generate creative and rewarding solutions to these problems. For these reasons, acting as a catalyst for sustainability is critical to our strategy and we stand with our clients, com-munities, and peers in our commitment to it. Q

six dollars under professional management LQ�WKH�8QLWHG�6WDWHV��,Q�WKH�ODVW�WZR�\HDUV��86�EDVHG�DVVHWV�XQGHU�WKHVH�VWUDWHJLHV�KDYH�grown 76 percent, exceeding $6.5 trillion in assets under management.7 To accommodate this demand, we launched our Investing with Impact platform, offering more than 120 vehicles that enable clients to align their val-ues with their investments. Products focus on a variety of objectives, including clean energy, pure water resources, and affordable housing. To date, our clients have invested more than $4 billion through the platform, and we aim to channel $10 billion to it over the next few years. Interest will grow with the coming generational wealth transfer: younger generations, poised to inherit some $40 trillion of wealth,8 are likely to seek products that pair economic returns with VRFLDO�DQG�HQYLURQPHQWDO�EHQH¿WV�RQ�D�PXFK�larger scale.

Third, we must invest our time, talent, and resources to advance sustainable growth and prosperity for all. Institutions like Morgan Stanley can contribute meaning-fully to sustainability by investing our time, talent, and resources. For example, we are collaborating with partners to provide economic opportunities to people with low and moderate incomes. Since 2010, we have invested more than $7 billion in high-impact programs such as equitable transit-oriented development and the Healthy Futures Fund, innovative programs that connect people in affordable housing with work and co-locate

1 World Population Prospects: The 2012 Revision��8QLWHG�1DWLRQV�'HSDUWPHQW�RI�(FRQRPLF�DQG�6RFLDO�$IIDLUV��3RSXODWLRQ�'LYLVLRQ��������XQ�RUJ�2 Vision 2050: The New Agenda for Business, World Business Council for Sustainable Development, 2010, wbcsd.org.3�7KH�¿JXUHV�DUH�DV�RI�$XJXVW�����������KWWS���ZZZ�PRUJDQVWDQOH\�FRP�DERXW�LU�VKDUHKROGHU���T�����06B�������B)RUPB��4B)LQDO�SGI��and September 30, 2014 (http://www.morganstanley.com/about/ir/shareholder/10q0914/10q0914.pdf?v=09302014), respectively.4 Sustainability accomplishments, Morgan Stanley, Global Sustainable Finance, morganstanley.com.5�=DFKDU\�6KDKDQ��³7KH�HOHFWULF�FDU�UHYROXWLRQ��:K\�HOHFWULF�FDUV�DUH�OLNHO\�WR�GRPLQDWH�LQ�WKH�QH[W�GHFDGH�´�-XO\�����������¿[�FRP�6 Q4 2014 Green Bonds Market Outlook, Bloomberg New Energy Finance, 2014, bnef.com.7�³86�VXVWDLQDEOH��UHVSRQVLEOH��DQG�LPSDFW�LQYHVWLQJ�DVVHWV�JURZ����SHUFHQW�LQ�WZR�\HDUV�´�86�6,)��7KH�)RUXP�IRU�6XVWDLQDEOH�DQG�5HVSRQVLEOH�Investment, November 20, 2014, ussif.org.8�-RKQ�-��+DYHQV�DQG�3DXO�*��6FKHUYLVK��³:K\�WKH�����WULOOLRQ�ZHDOWK�WUDQVIHU�HVWLPDWH�LV�VWLOO�YDOLG�´�3ODQQHG�*LYLQJ�'HVLJQ�&HQWHU��0D\�����2011, pgdc.com.

PERSPECTIVES ON THE LONG TERM!105

Governance And Stewardship For the Long TermDAVID WALKER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Minding the Gaps ANGEL GURRÍA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Long-Termism Begins with the BoardRONALD P. O’HANLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Taking the Long View On AfricaDONALD KABERUKA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Building a Board For the Long TermJULIE HEMBROCK DAUM AND EDWARD SPEED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

The Impact Of Regulation ANGELIEN KEMNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

GOVERNING

106!PERSPECTIVES ON THE LONG TERM

The need for leadership in the boardroom is even greater now than during the depths RI�WKH�¿QDQFLDO�FULVLV��,Q�D�FULVLV��WKH�ERDUG�DQG�H[HFXWLYH�DUH�FRQFHUQHG�ZLWK�VXUYLYDO��ZKHUH�WKHUH�PD\�EH�IHZ�LI�DQ\�DOWHUQDWLYHV�WR�¿UP�DQG�LPPHGLDWH�FRUUHFWLYH�DFWLRQ��:KHQ�D�FULVLV�SKDVH�SDVVHV��WKH�QHHG�LV�WKHQ�WR�VHW�D�VXVWDLQDEOH�ORQJ�WHUP�VWUDWHJ\��ZKLFK��VLQFH�LW�LV�OLNHO\�WR�LQYROYH�FRPSOH[�FKRLFHV��LV�PRUH�LQWHOOHFWXDOO\�FKDOOHQJLQJ��,Q�WKLV�FRQWH[W��WKH�WUDQVLWLRQ�WR�D�ORQJ�

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GOVERNING / David Walker

David Walker is chairman of Barclays. Previously, he served as chairman and CEO of Morgan Stanley International. Walker began his career with the British Treasury and served on secondment with the International Monetary Fund in Washington, DC. He was also one of four executive directors of the Bank of England and chairman of the Securities and Investments Board. Walker helped lead the independent review of the report produced by the Financial Services Authority on the failure of Royal Bank of Scotland in 2011.

Governance And Stewardship For the Long TermBoards and asset owners should focus on issues that can make a sustainable difference.

PERSPECTIVES ON THE LONG TERM!107

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Strategy is a fundamental responsibility of the board and should engage the whole board without delegation.

108!PERSPECTIVES ON THE LONG TERM

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3. Is the board interacting with the CEO and executive team in the most productive way? ,Q�P\�YLHZ�LW�LV�WKH�UROH�RI�WKH�FKLHI�H[HFXWLYH�LQ�DQ\�EXVLQHVV�WR�SUHVHQW�SURSRVDOV�WR�WKH�ERDUG�DW�WKH�EHJLQQLQJ�RI�WKH�VWUDWHJ\�SURFHVV��ZKROO\�GLVWLQFW�DQG�VHSDUDWH�IURP�DQ\�SUHRF�FXSDWLRQ�ZLWK�VKRUW�WHUP�HDUQLQJV�SHUIRU�PDQFH��,W�LV�WKHQ�WKH�ERDUG¶V�MRE�WR�UHYLHZ�DQG�WHVW�WKH�SURSRVDOV�ZLWK�ZKDWHYHU�GHJUHH�RI�FKDOOHQJH�LV�QHFHVVDU\��DQG�WKHQ�IRU�WKH�ERDUG�WR�IXOO\�HPSRZHU�WKH�&(2�WR�LPSOHPHQW�WKH�DJUHHG�RQ�VWUDWHJ\��,Q�WKLV�ZD\�WKH�&(2�LV��DSSURSULDWHO\�DQG�QHFHVVDULO\��DW�WKH�EHJLQ�QLQJ�DQG�HQG�RI�WKH�VWUDWHJ\�SURFHVV��

GOVERNING

Confidence in shareholder support should be a major priority for a board in developing a long-term strategy.

PERSPECTIVES ON THE LONG TERM!109

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Asset owners need to ensure that the mandates they give to third-party fund managers articulate their objectives and requirements as fully as possible.

110!PERSPECTIVES ON THE LONG TERM

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GOVERNING / Angel Gurría

Angel Gurría has been the secretary-general of the Organisation for Economic Co-operation and Development (OECD) since 2006. He has worked to reinforce the OECD’s role as a hub for global dialogue and debate on economic-policy issues. Previously, Gurría served as secretary of foreign affairs and secretary of finance in Mexico.

Minding The GapsWhy we need to encourage long-term investment

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Governments have the opportunity, and to a certain extent the responsibility, to build the foundations of a new era of sustained, inclusive, and sustainable growth.

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High youth unemployment has led to protests, like this one in Seville, Spain, in 2011.

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Embedded short-termism is a systemic challenge that is already recognized by many stakeholders, within and beyond the financial system.

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The lack of investment in the productive assets of the “real” economy, that is, a skilled workforce, new businesses, and modern infrastructure, must be urgently addressed.

116!PERSPECTIVES ON THE LONG TERM

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GOVERNING / Ronald P. O’Hanley

Ronald P. O’Hanley is the former president of asset management and corporate services at Fidelity Investments. Previously, he served as chief executive of Bank of New York Mellon Asset Management and vice chairman of Bank of New York Mellon; earlier, he was a partner at McKinsey & Company. O’Hanley has served on not-for-profit, healthcare, and mutual-fund boards and is an adviser to several financial-services and technology start-ups. He received a BA from Syracuse University and an MBA from Harvard Business School.

Long-Termism Begins with The BoardEnsuring commitment to a long-term mind-set requires a fundamental reconstitution of boards.

PERSPECTIVES ON THE LONG TERM!117

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Strategy remains the stepchild, often garnering only the most cursory review by the board. At heart, it’s because too often the urgent triumphs over the important.

118!PERSPECTIVES ON THE LONG TERM

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The Sarbanes–Oxley Act and other regulations enacted since 2000 have added to an already crowded board agenda.

GOVERNING

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Many boards lack the experience and expertise to engage effectively and critically with management in regard to their particular company’s long-term planning.

120!PERSPECTIVES ON THE LONG TERM

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The more companies are able to develop a base of long-term investors who understand the long-term mission, the more latitude management will have in working toward those goals.

GOVERNING

PERSPECTIVES ON THE LONG TERM!121

Taking the Long View on AfricaShort-term thinking blinds much of the world to the region’s potential.

The world’s perception�RI�$IULFD�VHHPV�WR�EH�GULYHQ�E\�D�¿[DWLRQ�RQ�WKH�UHJLRQ¶V�LPPHGL�DWH�FKDOOHQJHV��$V�D�UHVXOW��ORQJ�WHUP�WUHQGV�RI�KXJH�VLJQL¿FDQFH�DUH�XQGHUHVWLPDWHG��7KH�FRQWLQHQW¶V�GHPRJUDSKLF�DGYDQWDJH�RI�D�\RXQJ�DQG�JURZLQJ�SRSXODWLRQ��LWV�UDSLG�XUEDQL]DWLRQ�DQG�JURZLQJ�PLGGOH�FODVV��WKH�VSUHDG�RI�LQIRUPDWLRQ�DQG�FRPPXQL�FDWLRQ�WHFKQRORJ\�LQ�WKH�UHJLRQ��DQG�ODUJH�QDWXUDO�UHVRXUFH�GLVFRYHULHV�DOO�VHHP�WR�EH�GLVFRXQWHG��7KHUH�LV�OLWWOH�GRXEW�WKDW�$IULFD¶V�SROLWLFDO�

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Donald Kaberuka is president of the African Development Bank Group. Previously, he served as minister of finance and economic planning in Rwanda. He studied at the University of Dar es Salaam and earned a PhD in economics from the University of Glasgow.

Donald Kaberuka

122!PERSPECTIVES ON THE LONG TERM

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Africa has a demographic dividend that derives from an increase in the working-age population and a decrease in the dependency ratio, and must make the most of it.

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PERSPECTIVES ON THE LONG TERM!123

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Africa has a young and fast-growing population; by 2050, more than a quarter of its inhabitants will be between the ages of 15 and 24.

124!PERSPECTIVES ON THE LONG TERM

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For foreign investors, maximizing local labor and supply chains is not only sound business logic, it is also essential for sustainability.

GOVERNING

PERSPECTIVES ON THE LONG TERM!125

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Africa has crossed a threshold. Its young, vibrant population, thriving middle class, and bountiful natural resources represent a level of opportunity unsurpassed anywhere in the world.

126!PERSPECTIVES ON THE LONG TERM

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GOVERNING / Julie Hembrock Daum and Edward Speed

Julie Hembrock Daum leads Spencer Stuart’s North American board practice. A recognized expert on governance topics, she helped found and develop the Wharton School’s Corporate Governance: Fresh Insights and Best Practices for Directors program. Edward Speed is chairman of the worldwide board of Spencer Stuart and is active in CEO succession and board searches globally.

Building A Board For the Long TermDespite the more immediate concerns of investors, boards truly create value by looking further ahead.

PERSPECTIVES ON THE LONG TERM!127

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DSSRLQWHG�WR�WKH�ERDUG�IRU�WKHLU�DELOLW\�WR�provide insights into the strategy proposed by PDQDJHPHQW��\HW�ERDUGV�FRPPRQO\�FRPSODLQ�WKDW�WKH\�VSHQG�WRR�OLWWOH�WLPH�GLVFXVVLQJ�LW��7KH�SUHRFFXSDWLRQV�LQKHUHQW�LQ�TXDUWHUO\�FDSLWDOLVP�DUH�RIWHQ�DQ�XQZHOFRPH�GLVWUDF�WLRQ�IRU�ERWK�PDQDJHPHQW�DQG�WKH�ERDUG��ZKRVH�HQHUJLHV�DUH�EHWWHU�GLUHFWHG�WRZDUG�WKH�ELJJHU�SLFWXUH��$V�RQH�FKDLUPDQ�SXW�LW��³<RX�FDQ�VSHQG�DOO�\RXU�WLPH�WU\LQJ�WR�SUHYHQW�DFFLGHQWV��RU�\RX�FDQ�UHPHPEHU�WKDW�\RXU�MRE�LV�WR�FUHDWH�YDOXH�´:H�ZRXOG�DUJXH�WKDW�WKH�ERDUG¶V�¿UVW�SULRULW\�

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Independent directors are appointed to the board for their ability to provide insights into the strategy proposed by management, yet boards commonly complain that they spend too little time discussing it.

128!PERSPECTIVES ON THE LONG TERM

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Every new appointment to the board should be framed by the question, “Will this person uphold the long-term vision of value creation for the business?”

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The Impact Of Regulation Pension funds and regulators must work together to foster opportunities for long-term investment while ensuring stable, sound, and safe financial markets

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Angelien Kemna

Angelien Kemna is a board member and chief financial and risk officer of Netherlands-based APG. APG manages the pension assets of nearly 4.5 million Dutch citizens for its clients, all Dutch pension funds. Previously, Kemna was chief executive of ING Investment Management Europe. She is a member of the board of governors of Leiden University and chairman of the supervisory board of Yellow & Blue Investment Management, a Dutch venture-capital firm that specializes in renewable energy.

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With the right regulation in place, green bonds could help finance environmentally beneficial projects like these wind turbines in the Netherlands.

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FIRST STEPS FOR REGULATIONS THAT ENCOURAGE AND SUPPORT LONG-TERM INVESTMENT8QGHUVWDQGLQJ�WKH�IRXU�NLQGV�RI�LPSDFW�FDQ�KHOS�EULQJ�DERXW�UXOHV�WKDW�VDIHJXDUG�PDUNHWV�ZKLOH�PD[LPL]LQJ�WKH�RSSRUWXQLW\�IRU�ORQJ�WHUP�LQYHVWPHQW��:H�RIIHU�VSHFL¿F�H[DPSOHV�IRU�HDFK�FDWHJRU\�EHORZ��$OWKRXJK�WKHVH�

When regulations have the unintended effect of discouraging or even prohibiting long-term investment, they need to be identified and eliminated.

134!PERSPECTIVES ON THE LONG TERM

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GOVERNING

One barrier to long-term investment is a shortage of investment projects. There should be a broad assessment of how to stimulate the demand side of long-term investment.

PERSPECTIVES ON THE LONG TERM!135

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Rules should be appropriately tailored for different market participants. Unnecessarily broad rules cause needless constraints and ultimately a loss of return for pensioners.

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136!PERSPECTIVES ON THE LONG TERM

NICHOLAS CARRThe Human Advantage. . . . . . . . . . . . . . . . . . . . . 28

JULIE HEMBROCK DAUMBuilding a Board For the Long Term . . . . . 126

RICHARD EDELMANRestoring Trust In an Era of Change . . . . . . 12

LAURENCE FINKOur Gambling Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

JAMES P. GORMANThe Long-Term Imperative For Financial Institutions . . . . . . . . . . . . . . . . . . 100

ANGEL GURRÍAMinding the Gaps. . . . . . . . 110

DONALD KABERUKATaking the Long View on Africa . . . . . . . . . . . . . 121

ANGELIEN KEMNAThe Impact of Regulation . . . . . . . . . . . . . . . . . . . . 131

LIM CHOW KIATGIC’s Long-Term View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

CHANDA KOCHHARLong-Term Planning In a Volatile Environment . . . . . . . . . . . . . . . . . 53

WHITNEY MACMILLAN Generational Thinking at Cargill . . . . . . . . 48

KATHLEEN MCLAUGHLINBusiness and Society in the Coming Decades . . . . . . . . . 57

DOUG MCMILLONBusiness and Society in the Coming Decades . . . . . . . . . 57

EUAN MUNROGetting Beyond The Data Point . . . . . . . . . . . . . 80

NITIN NOHRIALong-Term Visions Cut Short . . . . . . . . . . . . . . . . . . . . . . . 36

RONALD P. O’HANLEYLong-Termism Begins With the Board . . . . . . . . . . . . 116

ADRIAN ORRAn Unshakable Belief in the Long Term . . . . . . . . . . . . . . . . . . . . . 64

GREG PAGE Generational Thinking at Cargill . . . . . . . . 48

HENRY M. PAULSON JR. Short-Termism And the Threat from Climate Change. . . . . . . . . . . . 16

PAUL POLMANSolving Problems That Matter . . . . . . . . . . . . . . . . . . . 42

JOHN D. ROGERSCapitalism in the Postfinancial Era . . . . . . . . . . 69

LYNN FORESTER DE ROTHSCHILDCapitalism for The Many . . . . . . . . . . . . . . . . . . . . . . . 23

MICHAEL SABIABuilding a Business-Owner Mind-Set . . . . . . . . . . . . . . . . . . . . . . . . 94

EDWARD SPEEDBuilding a Board For the Long Term . . . . . 126

CHARLES TILLEYReporting for The 21st Century . . . . . . . . . . 84

DAVID WALKERGovernance and Stewardship for The Long Term . . . . . . . . . . . 106

LEI ZHANGA Single Ladle From a Flowing Stream . . . . . . . . . . . 90

AUTHOR INDEX

2015 | FOCUSING CAPITAL on the LONG TERM