The Economic Significance of Long-Term Plans

NOVEMBER 2018

The Economic Significance of Long-Term Plans

THE ECONOMIC SIGNIFICANCE OF LONG-TERM PLANS | November 2018

About Us

MEET THE AUTHORS

Sakis Kotsantonis

Managing Partner

KKS Advisors

Christina Rehnberg

Associate Consultant KKS Advisors

George Serafeim

Professor, Harvard Business

School, Co-Founder, KKS Advisors

Brian Tomlinson

Research Director Strategic Investor Initiative, CECP

Bronagh Ward

Senior Associate Consultant KKS Advisors

CECP's Strategic Investor Initiative (SII)

The Strategic Investor Initiative (SII) is a coalition of leading companies and investors committed to re-orienting capital markets toward the long-term. SII convenes CEO-Investor Forums to provide a venue for CEOs to share their longterm strategic plans with audiences of long-term investors. Through leading research, SII assists companies in developing and communicating long-term plans that help inform the decisions of institutional investors.

KKS Advisors

At KKS, we advise leading organizations on bold and effective strategies that pave the way to a sustainable society. Formed with the vision to reshape markets, we enable clients to create long-term value through the integrated management of environmental, social, and governance factors. Applying our unique, research-backed approach, we work with corporations, foundations, NGOs and investors on sustainable strategies that deliver lasting impact. For more information, visit .

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THE ECONOMIC SIGNIFICANCE OF LONG-TERM PLANS | November 2018

Contents

Executive Summary

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1.What is the Problem with Corporate

Communications and How Can We Solve It?

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2.Do Capital Markets React to Long-Term Plans?

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3.What Constitutes a Good Long-Term Plan?

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4.Implications of Our Research

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5.Appendix

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6. Technical Documentation

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THE ECONOMIC SIGNIFICANCE OF LONG-TERM PLANS | November 2018

Executive Summary

Short-termism in capital markets has increasingly become a concern for both companies and the investor community. Although there have been widespread calls for investors and companies to pay more attention to the long-term, until recently there was no platform for companies to exchange long-term information with their long-term investors. CECP's Strategic Investor Initiative (SII) presents a solution to this structural gap in corporateshareholder communications, with CEO-Investor Forums providing the stage for CEOs to share their long-term strategic plans with institutional investors.

The purpose of this research is to understand whether investors consider the long-term information provided at the CEO-Investor Forum as decision-relevant and to assess the quality of specific disclosures and the overall long-term plan. We do this by examining the capital market reactions following the presentations and by creating a framework for assessing and structuring an effective long-term plan. We recognize that the sample we examine is small and therefore we regard our evidence as a first attempt towards creating a market infrastructure for the systematic and rigorous examination of strategic long-term plans.

Our work adds significant weight to the argument for companies and investors to engage in dialogue about the long-term as it is value-enhancing. It is time for corporate communication strategies to evolve; disclosing more actionable long-term information can be an effective way to reorient capital markets towards the long-term.

Going forward, companies should voice their longterm strategies to investors to drive sustainable longterm value creation, using our long-term plan content framework to guide their efforts. Our own long-term plan will include the creation of a database with best practices and quality long-term plan content as a resource for companies, investors and researchers. As more of the world's largest companies join our initiative and the sample size grows, we expect the evidence to become even stronger, leading to a new paradigm where long-term plans are considered an essential part of corporate communications strategies and investors have the information they need to invest for the long-term.

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THE ECONOMIC SIGNIFICANCE OF LONG-TERM PLANS | November 2018

FIGURE 1. 9 THEMES FOR A GOOD LONG-TERM STRATEGIC PLAN

Financial Performance

Capital Allocation

Trends

Competitive

Risks &

Positioning Opportunities

Corporate Governance

Corporate Purpose

Human Capital

Long-Term Value

Creation

Summary of Key Findings

Capital market reactions to long-term plans:

? Long-term plans are associated with abnormal market reactions for both stock prices and trading volumes within three and five days after the presentation. This translates into the long-term plans providing information that investors find value-relevant.

? We find no significant difference in analyst revisions of their forecasts in response to the information presented. This is consistent with sell-side analysts being primarily focused on short-term financial results delivered on the earnings call.

? We find evidence that better quality disclosure on themes like corporate purpose and competitive positioning is linked to larger capital market reactions.

What makes a good quality long-term plan?

? We find variation in the quality of disclosure across themes and issues that are important for a long-term plan:

a. CEOs seem to be comfortable disclosing forwardlooking metrics on their competitive positioning, market and mega-trends, and financial performance.

b. There is a lot of discussion around corporate purpose and the value of the company's strategic partnerships, but the information is broad and fails to take a forward-looking view.

c. CEOs appear to be struggling with incorporating information about corporate governance and assessments of financially material environmental, social and governance (ESG) issues in the long-term plan presentations.

? There is variation in the overall quality of long-term plan disclosures. The most comprehensive presentations were given by Beckton Dickinson, Medtronic, and PG&E (see videos and transcripts here).

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