Short-termism in both corporations and investment management destroys long-term value. Incentives that focus on short-term goals, like quarterly earnings or beating benchmarks annually, encourage behaviors that are not in the best interests of long-term shareholders or clients. The document proposes alternatives like long-term stock options, multi-year performance plans, and long-term performance fees that better align incentives with long-term value creation. It argues there is a better way of managing companies and investments with a long-term focus that benefits all stakeholders.

1. Building Long-Term Value in a Short-Term World Alfred Rappaport

2. Essential Messages Short-termism destroys Incentives matter There’s a better way 2

3. Financial Crisis of 2007-9 Public sector culprits Congress Federal Reserve Government bailouts 3

4. Financial Crisis of 2007-9 Private sector culprits Homebuyers Appraisers Lenders Credit-rating agencies Corporate boards Investment banks Institutional investors 4

5. Corporate Short-Termism “Talks” shareholder value “Walks” quarterly earnings 5

6. Pay-Performance Disconnects Annual performance plans Multi-year plans Non-financial performance incentives Standard stock option plans Restricted stock grants 6

7. Superior Long-Term Performance Plans Indexed option plans Equity-premium option plans (EPOPs) 7

8. Essential Habits of Value-Creating Companies Do not manage short-term earnings. Select strategies that maximize long-term value even if they lower near-term earnings Instill a consumer equity mindset throughout the organization. Reward employees at all levels for delivering superior long-term value. Return cash to shareholders when there are no value-creating investments. Provide investors with value-relevant information. 8

9. Overhaul of Corporate Reporting The objective The shortfall Corporate Performance Statement 9

10. Corporate Performance Statement 10

11. Investment Management Short-Termism Relative performance measurement Benchmark index Similar funds Tracking error 11

12. What Determines Investor Returns? Fees and expenses Manager incentives Performance-chasing Numbers to remember 60%, 70%, 80% 9%, 7.5%, 6%, 12

13. Long-Term Performance Fees Base fee Rewards and penalties Performance measurement period 13

14. Performance Plan Benefits Longer time horizons Lower fees, higher returns 14

15. Tilting the Investment Odds Concentrated funds Expectations investing process 15

16. Essential Messages Short-termism destroys. Incentives matter. There’s a better way. 16

17. Read a sample chapter Available now