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.

• Author: Samuelson, Judith
• Position: SHAREHOLDER VALUE

IF WE HAVE ANY DOUBT about the prevalence--and cost--of "short-termism" in U.S. capital markets, the current 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 destroyed 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 regulatory and corporate governance systems that failed to curb the excesses. But how will the business and investment community 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 contribute 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 Company Accounting Oversight Board, issued a charge to participants 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 undermines 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. Spearheaded 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 promising 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 benefit of their companies and the health of the market economy (see excerpt in Exhibit 1 on page 46).

Exhibit 1 A look at the Aspen Principles

The Aspen Principles address three equally important factors in sustainable long-term value creation: metrics, communications, 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...