The Aspen Principles: A better way forward.
By Judith Samuelson

Shareholder Value directors & boards I f we have any doubt about the prevalence — and cost — of “short-termism” in U.S. capital markets, the cur- rent economic fallout ought to offer useful data. The subprime crisis, when the final losses are tallied, is being projected by some at $500 billion to up to $1 trillion in de- stroyed value. The cost of this crisis is felt not only on Wall Street by the banks with their massive loan write-offs but also on Main Street and in communities and neighborhoods by those least able to withstand the financial blow. The debate has already begun about how to fix the regu- latory and corporate governance systems that failed to curb the excesses. But how will the business and investment com- munity respond, not only to the losses of this magnitude but also the suggested fixes? What is the role for companies and their boards? One response to this question comes from recent action by business, labor, institutional investors, and their respective trade associations. This coalition of “strange bedfellows” has been working to identify the behaviors and practices that con- tribute to short-termism — and to a better way forward. Root of this reform movement The seeds for this coalition were planted when Bill McDonough, then chairman of the Public Com- pany Accounting Oversight Board, issued a charge to par- ticipants at the 2004 CEO Summit of the Aspen Corporate Values Strategy Group (CVSG). The topic was market fallout related to Enron and how fixation with quarterly profits un- dermines long-term value creation and U.S. competitiveness. McDonough’s charge called for 20 “vanguard” companies — with sufficient market cap to move the needle — to become champions of the long-term perspective: evangelizing for it, adopting policies and practices that promote it, and openly communicating their successes and failures in applying it. In June 2007, this same group released the Aspen Principles for Long-Term Value Creation as a call to action and to build the dialogue about the costs of short-term thinking. Spear- headed by the Business Roundtable (BRT) and the Council of Institutional Investors (CII), this working group of leaders and advocates from business, Wall Street, pension management, and labor had been working for close to a year to identify the factors leading to short-termism, as well as the most promis- ing strategies for reintroducing long-term bias and returning greater balance to capital markets. The participants actively debated — and ultimately agreed on — a set of business and board practices that emphasize long-term focus for the ben- efit of their companies and the health of the market economy (see excerpt in Exhibit 1 on page 46). A motivated group In addition to the leadership of BRT and CII, active members of the working group that produced the Aspen Princi- ples included Steve Odland, CEO of Of- fice Depot and then-chair of the BRT’s C o r p o r a t e G ove r n a n ce Ta s k Fo rce ; governance experts Ira Millstein, John Olson, and John Wilcox; Peggy Foran, Pfizer Inc.’s senior vice president of cor- The Aspen Principles: A better way forward A critical mass of ‘strange bedfellows’ came to market in 2007 with a plan to reverse the destructive pull of short-termism. By Judith Samuelson Judith Samuelson is the executive director of the Aspen Institute’s Business and Society Program (www.aspenin- She created the policy program, which is dedi- cated to developing leaders for a sustainable global society, for the Aspen Institute in 1998. Her experience spans the business, government, and nonprofit sectors. She joined the Ford Foundation in 1989 and served through 1996 as director of the Office of Program-Related Investments, the foundation’s social investment fund. In 1994 she helped launch the foundation’s Corporate Involvement Initiative, a comprehensive effort to encourage private-nonprofit part- nerships and facilitate business opportunities with broad social benefits.Continued on page 46 Shareholder Value 6 directors & boards porate governance; Fred Buenrostro, who just stepped down as head of CalPERS; and Damon Silvers of the AFL-CIO. Herb Allison, CEO of TIAA-CREF, hosted the CVSG working group on three occasions. What motivated the participants who engaged in the dia- logue and drafting? Members of the professions who partici- pated — like Beth Brooke of Ernst and Young and Jim Quigley of Deloitte — talked about restoring the public confidence in business. McDonough reminded the participants that regula- tory action would follow public concern over excessive CEO pay unless business took action first (and a major section of the Principles is dedicated to this topic.) U.S. competitiveness was often discussed — especially the concern that quarter- to-quarter management may negatively influence long-term R&D, for example. Finally, the Aspen Institute’s Business and Society Program, which convened and facilitated the process, asked whether reintroducing a long-term bias could help busi- ness to free up talent and innovation to help address complex problems like global warming and global poverty. These are among the many motivations that drew the participants to the table. Not just a checklist Chuck Prince, while head of Citigroup, and Jeff Kindler, CEO of Pfizer, challenged the coalition to pursue key principles for long-term value creation rather than a “checklist” of specific practices. The agreed-upon goal was to illuminate management prac- tices, but also to open dialogue between like-minded compa- nies and long-term-oriented investors such as the union and public pensions. The group engaged in spirited discussion, but attempted to avoid pointing fingers at the cause of short-term pressures. They acknowledged that short-termism is a com- plex dance involving both companies and investors — and that the principles must speak to both parties in order to bring about real change. Anne Mulcahy, CEO of Xerox, who endorsed the Principles early on, said the consensus document was “a mile- stone in business history.” That docu- ment, formally titled “Long-Term Value Creation: Guiding Principles for Cor- porations and Investors,” was what we released to the public in June 2007. It identifies key practices in three areas: — setting long-term metrics that de- emphasize EPS and quarterly profits as the metric of choice; — communication practices designed to “amplify” the voice of the long-term investor; and — incentive systems and compen- sation schemes that reward long-term focus and success. The Aspen Principles do not address every issue debated in corporate gov- ernance circles. They draw from the work of many organizations that have contributed to the critique of shor t- termism — including the Conference Board’s Blue Ribbon Commission on Public Trust and Private Enterprise, led by Pete Peterson and John Snow after the Enron debacle; the work of funds like CalPERS; and good governance groups like the Committee for Economic De- velopment. Important signatories Since the public release of the Aspen Principles, many of the organizations and companies represented in the work- The Aspen Principles address three equally important factors in sustainable long-term v a l u e c r e a t i o n : m e t r i c s , c o m m u n i c a- tions, and compensation. The following is the “defining of metrics” section of the Principles. 1. Define Metrics of Long-Term Value Creation Companies and investors oriented for the long term use forward-looking incentives and measures of performance that are linked to a robust and credible business strategy. Long-term oriented firms are ‘built to last,’ and expect to create value over five years and beyond, although individual metrics may have shorter time horizons. The goal of such metrics is to maximize future value (even at the expense of lower near-term earnings) and to provide the investment community and other key stakeholders the information they need to make better decisions about long-term value. In pursuit of long-term value creation, companies and investors should… 1.1 Understand the firm-specific issues that drive long-term value creation. 1.2 Recognize that firms have multiple constituencies and many types of investors, and seek to balance these interests for long- term success. 1.3 Use industry best practices to devel- op forward-looking strategic metrics of cor- porate health, with a focus on: • enhancing and sustaining the value of corporate assets, • recruiting, motivating, and retaining high-performing employees, • developing innovative products, • managing relationships with customers, regulators, employees, suppliers, and other constituents, and • maintaining the highest standards of ethics and legal compliance. 1.4 Deemphasize short-term financial metrics such as quarterly EPS and empha- size specific forward-looking metrics that the Board of Directors determines are appropriate to the long-term, strategic goals of the firm and that are consistent with the core principles of long-term sustainable growth, and long-term value creation for investors. Source: “Long-Term Value Creation: Guiding Principles for Corporations and Investors,” released by The Aspen Institute Business & Society Program, June 2007 To download a full version of the Principles, visit the Corporate Values Strategy Group homepage at cvsg. Exhibit 1 A look at the Aspen Principles The Aspen Principles Continued from page 4 Shareholder Value annual report 2008 7 ing group, plus important players like the National Association of Corporate Directors (NACD), the U.S. Chamber of Commerce, and the Center for Audit Quality (representing the largest public accounting firms), corporations such as Apache, Duke, Office Depot, and Pep- siCo, and executive compensation firm Frederic W. Cook & Co., have signed on, illustrating the wide appeal of the Principles’ collaborative approach. The signers are organizations and compa- nies, rather than the individuals who lead them (see Exhibit 2). Impor tantly, operating companies and institutional investors who endorse the Principles agree to suppor t each other even in the face of internal and external pressures to compromise on these principles and default to short- term thinking. A number of supportive parties and signers to the Principles are collaborat- ing on research and education about the corrosive effects of quarterly earnings forecasts — the so-called earnings guidance system. In summer 2008, CVSG participants will convene the annual summit to look at progress and to consider supportive government policy. The Principles have been the focus of panels and discus- sions in over a dozen venues, including the NACD’s 2007 an- nual conference, the Committee for Economic Development working group on corporate governance, Yale’s Millstein Cen- ter for Corporate Governance and Performance, and the In- ternational Corporate Governance Network. Bringing the principles to life Recent events underscore the importance of this work. Pfizer, one of the early signers, made headlines when it took the un- usual step of inviting its largest institutional investors in to dis- cuss long-term drivers of performance, company strategy, and governance practices with members of its board of directors. So the Aspen Principles are already driving change. Meeting the goal of “infecting the wider market,” however, lies ahead. In the last several months, the CVSG has shifted focus from drafting and communicating about the Aspen Principles to featuring practices that bring the principles to life. The focus is on what is possible: sending the message that individual companies can take action to balance short-term pressure with long-term orientation — that they can and should shift at- tention from the next quarter to the areas of investment and metrics that secure long-term value. Concern about short-term pressures is so pervasive. War- ren Buffett, Pete Peterson, and Bill Donaldson are among the respected leaders who have continually voiced concern about excessive short-term focus in corporate and investment deci- sion making, pointing to the deleterious effects on firm perfor- mance, investor returns, national competitiveness, and long- term economic growth. Fallout even ranges from shrinking CEO tenures to a lessened concern for the public welfare. They cite Google, which captured the notice of the investment com- munity when it eschewed the attention of short-term investors by refusing to forecast its earnings. These leaders seek a better balance in short- and long-term metrics to enable business to do what it does best — create valuable goods and services, invest in innovation, take reasonable risks, and develop human capital. The Aspen Principles stem from this fundamental no- tion that favoring a long-term perspective will result in better economic returns and a greater business contribution to the public good. Powerful resolve Many CEOs consider reducing short-term market pressures to be outside their purview. Certainly, one company by itself can do little. But history shows that the right people, working in concert, can alter markets for good. In 1950, American statisti- cian W. Edwards Deming convinced 21 leaders of Japan’s most important industries that a focus on quality was the answer to the country’s economic problems. Collectively, these busi- ness leaders adopted his recommendations, kicking off what became a manufacturing and economic renaissance for Japan. The challenge of lengthening time horizons and recalibrat - ing decision rules in business and investing is no less complex a task. It requires powerful commitment and resolve by the most important market players. The good news is that, unlike most attempts at reform, the Aspen Principles for Long-Term Value Creation begin with — rather than build to — critical mass. ■ The author can be contacted at Business Apache Corp. Duke Energy Corp. Office Depot PepsiCo Inc. Pfizer Inc. Xerox Corp. Business Roundtable* Financial Executives International U.S. Chamber of Commerce Professional Services Center for Audit Quality Frederic W. Cook & Co. Inc. Labor AFL-CIO Change to Win Investment Group Exhibit 2 Subscribers to the Aspen Principles Institutional Investors California Public Employees’ Retirement System (CalPERS) California State Teachers’ Retirement System New York State Common Retirement Fund TIAA-CREF Universities Superannuation Scheme, U.K. Council of Institutional Investors* Corporate Governance National Association of Corporate Directors Henry B. Schacht, Warburg Pincus LLC Ira Millstein, Weil, Gotshal & Manges LLP John Olson, Gibson, Dunn & Crutcher LLP Patrick W. Gross, The Lovell Group William H. Donaldson, Donaldson Enterprises Inc. Subscribers as of April 2008 * Co-convener of the Principles Drafting Committee

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