Integrated Reporting and Investor Clientele

Although corporate executives often complain about investor short-termism, they have only recently begun to actively manage the composition of their shareholder base in ways designed to attract longer-term investors. This article argues that given the difficulties in forecasting performance over long time horizons, companies that want to attract long-term investors may find it helpful to communicate information about ESG policies and other indicators of management's time horizon that can be especially important when assessing long-run corporate profitability and value. In support of this hypothesis, the findings of the author's recent study show that companies that have practiced some version of sustainability or "integrated" reporting for the past decade or so have succeeded in increasing the proportion of longer-term investors in their shareholder base. Moreover, as might be expected, this effect of integrated reporting has been most pronounced for certain kinds of companies: (1) those with higher price-to-book ratios, whose total value is thus more heavily weighted toward future growth opportunities than "current operations value"; (2) those currently facing strong social pressure to respond to perceived social problems; (3) those with dispersed ownership (as opposed to family-owned and other closely held companies, whose concentrated ownership is believed to help overcome the time horizon problem); and (4) those demonstrating a consistent commitment to integrated reporting practices. Also attracting longer-term investors are companies that provide more information about the six forms of "capital" identified by the IIRC as critical to corporate success (along with "financial" capital, the others are "natural," "human," "intellectual," "manufacturing," and "social relationships") while adhering to other of the IIRC's guiding principles. As the author sums up the main message of his study, companies with effective ESG programs have the power and means to change their shareholder base in ways that can help insulate management from pressure for short-term performance at the expense of long-term value, including corporate investments in sustainability initiatives.