Short Termism

3 Key excerpts on "Short Termism"

• 

  eBook - ePub

  Boards Under Crisis

  Board action under pressure

  • Carmelo Mazza, Alberto Lavin Fernandez(Authors)
  • 2014(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3

  Short-Termism: What You Can Do Tomorrow Will Largely Depend on Your Thinking Today

  Focus on the short term has been suggested to be causal to the crisis situations during the first part of the 21st century and, specifically, causal to the one we are currently experiencing (Davies, 2010). For example, Dobbin and Jung (2010) suggested that the domination of ‘the quarter’—the quarterly profit report and its accuracy with analysts’ forecasts and projections—had already become the center of CEO focus and attention in the early 1990s. This pressure has lately increased due to amplified uncertainty under crisis, which in turn creates stronger incentives to focus on quarterly results. In this chapter, we unfold the concept of short-termism during crisis and discuss how it affects boards’ decision-making.

  Why short-termism?

  Quarterly results present an interesting paradox: although a milestone through which to measure business performance, they turn out to be the objective of business performance rather than the means of measuring it. Besides the potential risk of this force for the ‘true and fair view’ of financial statements, our interviewees report that this pressure for the short term might threaten sustainability. Stewardship may not be perceived as important as short-term results and, hence, the risk of postponing important decisions increases for the sake of shorter-term results. This is not to say that short term always offsets long-term interest (on the contrary: there is very often no long term without short term) but it is an additional force stretching management or, at least, influencing business performance communication (to external stakeholders).

  This drift may be intensified by certain compensation tools, particularly when they intensely reward short-term results. Dobbin and Jung (2010) suggest that external pressures together with some executive compensation instruments (e.g. stock options) created an incentive for earnings management, a well-known practice of using discretion in financial reporting in order to inflate earnings and potentially exceed market expectations, either in the present or in the future (Martin, 2011; Healy and Wahlen, 1999).1

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Corporate Strategy (Remastered) I

  High Performance Strategy and Leadership in a Volatile, Disrupted World

  • Paul Hunter(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  As often happens in practice today, the innocent strategy workshop convener who has spent some time in the accounting or similar administration department could well see the planning process as something like a two- to three-year extension of the one-year budget. That is because they will probably be relying on prevailing company-specific traditions, forms and frameworks used in past years. Alternatively, they may be relying on the views expressed in the textbook they used at business school. Inevitably, the focus of the planning event will be placed very much on the development (often from scratch) of many of the issues that should more appropriately be concerned with Long Term Strategy but are not. Similarly, many long term issues are confused with Short Term Strategy, making short term initiatives hard to identify and even harder to implement.

  A consequential outcome from not differentiating between the two is the apparent overemphasis on short term thinking in business at the expense of long term strategising. As an example of how this difference in emphasis plays out, Hamel and Prahald (1994), made an astonishing accusation in the Harvard Business Review that is still relevant today: “Most layoffs at large US companies have been the fault of managers who fell asleep at the wheel and missed the turnoff for the future”. It’s fair to say that if the future is only defined by the next three, even five years, it is no wonder that these executives overlooked the need to invest in new capital or redirect existing capital in 10- to 20-year cycles. It is also no wonder that strategies of operationally focused adaptation (cost reduction, reengineering and outsourcing) overshadowed the far more growth-oriented strategies of prosponsive invention and everything else that goes with a 10- to 50-year outlook (as will be observed in the Ford Case example 2.3 ).

  Nor is it any wonder that

  a compulsion to focus on short term strategic planning has left long standing industry incumbents wallowing in a state of despair as agile, future focused start-ups disrupt entire industries.

  The truth is, such start-ups are unencumbered by ageing, high-cost plants and equipment and old-fashioned financing methods. So are they unencumbered by ageing, high-cost thinking and old-fashioned leadership styles. With a focus on the long term, they are free to deploy lower-cost, agile infrastructures funded by financial mechanisms that didn’t exist even a short time ago. They are, therefore, able to literally knock industry incumbents off their perch, one by one.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Moving Beyond Modern Portfolio Theory

  Investing That Matters

  • Jon Lukomnik, James P. Hawley(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  3     Short-termism

  Short-Termism

  There is nothing inherent in Modern Portfolio Theory (MPT) that would favor the short term over longer time frames. Indeed, by creating an intellectual paradigm that allows investors to more comfortably access riskier and longer-dated investments with cash flows extending far into the future (like equities), MPT should have helped to create a long-term investor mind-set. Yet for decades the academic literature and daily news reports have been awash with reports of “short-termism.” The CFA Institute, which is the think tank of the accreditation body for hundreds of thousands of analysts and portfolio managers around the globe, even hosts a web page titled, simply, “short-termism.” Here is what it writes:

  “Short-termism refers to an excessive focus on short-term results at the expense of long-term interests. Short-term performance pressures on investors can result in an excessive focus on their parts on quarterly earnings, with less attention paid to strategy, fundamentals and long-term value creation. Corporations too often respond to these pressures by reducing their expenditures on research and development and/or foregoing investment opportunities with positive long-term potential. These decisions can weigh against companies’ development of sustainable products or investment in measures that deliver operational efficiencies, develop their human capital or effectively manage the social and environmental risks to their business.”1

  We believe that the CFA Institute is correct that investors often think irrationally about time frames. (By irrational, we mean that investors act in ways that are demonstrably contrary to their interests.) MPT is not the villain here, but neither is it an innocent bystander. Just as MPT does not cause systematic risk, but its lack of focus on a way to combat it creates the MPT paradox; so, too, MPT’s focus on portfolio construction and its implication that trading activities are needed to do so does not cause short-termism, but it discourages the actions that could combat it and could contribute to the conditions that encourage short-termism.

  Sign up to read

  Learn more about book