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How to build an alliance against

 Public-company managers are quick to bemoan the pressures they face to emphasize short-term financial performance at the expense of long-term value creation. Depending on the day, they point the finger at a range of culprits, including market pressure, economic uncertainty, and investors. But it’s time managers took a harder look at themselves and the tools they have to build alliances against the corrosive effects of corporate short-termism.

It is true that short-term investors and their proxies, sell-side analysts, are the most visible participants on quarterly earnings calls and in contacting companies for the insights upon which they trade. The pace and volume of those trades may often dominate a company’s daily trading activity. But it’s worth recalling that short-term investors are usually a minority of a company’s shareholders. Overall, they own only around 25 percent of shares held by US companies (Exhibit 1). In fact, seven in ten shares of US companies are owned by longer-term investors: individuals, index funds, and more sophisticated long-term investors.

As prior McKinsey analysis has shown, this last group, also known asintrinsic investors, has an outsize influence on a company’s share price over time. With their deep understanding of a company’s intrinsic value and their willingness to make large investments, they often see even bad news, in the short term, as an opportunity to increase their holdings of a company whose strategy and management they support. That gives companies more room than many managers realize to make decisions that create long-term value—even at the risk of short-term volatility. This also benefits all long-term shareholders by keeping share prices in line with a company’s intrinsic value and preventing prices from falling too far out of line, relative to the company’s peers.

Executives need to understand intrinsic investors better. To begin an ongoing dialogue, McKinsey and the Aspen Institute Business & Society Program1convened a group of public-company CFOs and intrinsic investors in late 2014 to discuss their mutual interests. The following year, as discussions continued, we also surveyed and interviewed intrinsic investors, with an average holding period of six years. Our interpretation of these discussions and survey results does not necessarily reflect the views of every participant. But the consensus of the group was that all public-company CEOs, CFOs, and corporate boards should be doing what they can to attract and retain a critical mass of intrinsic investors in order to blunt the effects of short-termism and best support a strategy of long-term value creation.

Our research indicates that four initiatives seem to resonate with intrinsic investors and could prove useful for managers eager to achieve this goal. They include pursuing long-term value creation even at the expense of short-term earnings, proactively structuring investor communications, resisting artificial efforts to meet earnings targets, and rethinking management’s approach to quarterly earnings calls.