Short-termism

Here’s an interesting quotation from “Breaking the Short-Term Cycle: Proceedings of the CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics Symposium Series on Short-Termism” published earlier this year. It points to many of the aspects of “fast management” that have been noted on this site, including the tendency to view measurements produced by accountants as if they describe reality, not mere accounting conventions:

Short-termism refers to the excessive focus of some corporate leaders, investors, and analysts on short-term, quarterly earnings and a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation. An excessive short-term focus combined with insufficient regard for long-term strategy can tip the balance in value-destructive ways for market participants, undermine the market’s credibility, and discourage long-term value creation and investment. Such short-term strategies are often based on accounting-driven metrics that are not fully reflective of the complexities of corporate management and investment.

There is a great deal of learned debate about the reasons for short-termism and its effects on commerce, especially on investment markets. A quick search of the Internet will turn up hundreds of references, both pro and con. Much of this debate is shrouded in language so full of financial jargon as to make it unintelligible to anyone outside the investment community.

By chasing “hot” stocks and continually buying and selling to try to generate higher returns, investors cause the very problem they complain about: managers who will sacrifice the future to produce a short-term win.

I think there are simple ways of looking at this problem. Firstly, when society as a whole is fixated on immediate gratification, it is unlikely that investors will be any different. By chasing “hot” stocks and continually buying and selling to try to generate higher returns, investors cause the very problem they complain about: managers who will sacrifice the future to produce a short-term win. Investment used to be about putting money into a business and relying on a steady stream of earnings from dividends. Now many large businesses no longer pay dividends at all, and investors have moved away from true investment into becoming traders: people who make their money by continually trying to buy and sell at a profit. A quick glance at the number of shares changing hands daily on the New York Stock Exchange and Nasdaq will prove that both now cater primarily to short-term traders, not long-term investors.

Another factor is diminishing levels of trust. To stay invested for the long term, shareholders must trust the organization’s managers to be good stewards of their money. To manage from a long-term perspective, executives need to trust that the shareholders won’t suddenly withdraw their support, or force some radical change of direction, if they go through a temporary bad patch.

What we see is the opposite: organizations that appoint new leaders with loud fanfares, then fire them if they don’t produce the desired upward movements in profits and share price in the blink of an eye. It’s the downside of the fashionable cult of proclaiming certain individuals to be exceptional and heroic leaders. If you believe appointing one person can change the fortunes of a massive corporation (a totally irrational belief, but a common one), you will also believe that the same one person might be the cause of all its problems. Shareholders often drive down the price of a company’s shares because of disappointment that a CEO’s policies aren’t paying off as quickly as they wanted—which is usually very quickly indeed.

Without patience or trust, there can only be short-term objectives, since no one is prepared to take the risk of waiting for the longer-term to receive their payoff. Rather than wailing about inherent short-termism among managers and investors, we should look to the underlying cause: our habitual impatience and greed for getting what we want without waiting for it. Such attitudes used to be seen as evidence of childishness. Today they are often praised as showing “drive” and “get up and go.”

It’s assumed no one pays attention for more than 30 seconds.

If people have a short attention span, the media undoubtedly carries much of the blame. As Dave Hurd wrote in an extremely funny and perceptive article in Rogue Project Leader magazine:

The media has to explain what we just heard a politician say. Not only that, but if you missed the speech you have virtually no chance of seeing it again in its entirety. Unless you read an impeccable news journal you’re not going to see the full speech again. It gets spoon fed to us in clips, sound bites, and analysis.

It’s assumed no one pays attention for more than 30 seconds. If you do, the continual repetition, oversimplification, and manufacturing of sound bites can drive you mad with frustration.

The cure for short-termism is simple: slow down and think.

We cannot have it both ways. If we want to place our hopes on long-term growth and stability, there is no place for short-termism. If we simply want jam now and to hell with tomorrow, we have to accept that eating our jam today may be followed by long periods on bread and water. It’s more profitable to reevaluate the measures of success that are in use than to castigate people for trying to match up to them. Simon Caulkin, writing in The Observer, a British Sunday newspaper, on July 23, 2020, quoted Fred Reichheld, director emeritus of consultancy Bain, this way:

The culprit . . . is the profit-based system most companies use to manage performance. Managers are judged and often rewarded on their profit figures. But financial measures make no distinction between how profits are earned. Are they the result of creating new value from customer relationships ('good profits' from increasing loyalty), or were they earned by appropriating value from them ('bad profits')?

All that cheap advertising and discounting wins the shortest of short-term customers: the kind who will buy from whoever is selling at the lowest price today, regardless of anything else. Such customers are more than fickle. They have no product or brand loyalty, so their purchase is always a one-off event. Adding more of them simply increases the “churn rate” at which existing customers must be replaced by new ones—a process that adds considerably to costs without creating any actual value.

The cure for short-termism is simple: slow down and think. Then think some more. Reflect on the real, lasting value of whatever you are doing or rewarding. The old saying is that if you pay peanuts, you get monkeys. If you reward gut-reactions and snap judgments, you’ll end up with leaders who behave like Pavlov’s dogs, salivating whenever the shareholders ring a bell and yell for fresh short-term profits. I guess shareholders get the managers they deserve . . . and vice versa.

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