As an officer in two public companies and a Board member for a third public company, I've seen up close and personal the challenges executive leadership faces when trying to balance achieving the quarterly results while knowing that they need to make long term investments in research and innovation. This short-term thinking on quarterly results has had a significant impact on large organizations ability to prioritize long term strategic investments.
In a recent article in The Atlantic titled “How To Stop Short-Term Thinking at America's Companies“, Alana Semuels calls out the risk and challenges caused by the growing focus on the quarterly results. When I read the article, it struck a cord and brought back the memories of the struggles and frustrations I experienced. As the person responsible for the R&D and innovation portfolio for the companies I worked for, I was frustrated that “my boss didn't get it” while also understanding the pressure they were under. It was the classic no-win situation.
Short-Term Thinking
Some key points discussed in the today's show included:
- The focus on quarterly results is the result of how CEO's and their teams are compensated.
- The “blame” for this focus? Quarterly results will deliver the best results to the shareholders.
- There is a shift in how long “us” hold on to our investments. In 1960, the average was 8 years while in 2016, it shrank to 8 months.
- 80% of CFO's from the 400 largest public companies admitted they would sacrifice “economic value” to meet quarterly results!
- Share buy backs don't work and redirect cash away from R&D, innovation and workforce investments.
- Most equity is held by pension funds and other institutional investors who are focused on long range investment. Therefore, the belief that shareholders are focused on the short term in suspect.
- 4 ideas to encourage long term investment covered in the article:
- Create a corporate tax structure to encourage bringing money back to the US (repatriation).
- Accelerated depreciation by allowing 50% of an investment in equipment to be deducted immediately.
- Increased government spending in support of R&D and innovation.
- Incentivize investors to hold assets longer by graduating tax reduction over longer period of times.
- Structure voting rights for shareholder tied to how long they've held the shares.
- You can have an impact:
- Think about your own investment strategies (e.g. your retirement, etc). Are you part of the “short term” problem?
- Send the article and this podcast to your manager, CEO and your government officials.
- We can have an impact. We need to have an impact.
Additional Resources:
- How to Stop Short-Term Thinking at America’s Companies: U.S. companies are hyper-focused on quarterly earnings. What can be done to push them to invest more in the years and decades ahead? by Alana Semuels of The Atlantic
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Phil, after hearing your stance on the negative effects of short term (stock price led) actions by business leaders, I had to comment.
You mentioned that 80% of all company stocks are held by pension funds and that they should have a long term view. Still they are chasing short term, over long term gains. In my view, these pension funds are caught in the same game that they created themselves.
Their own stock price and attractiveness to both investors and pension holders is now based on quarterly results as well. They therefore have to squeeze as much as possible out of the current quarter to meet market expectations, at the cost of any long term investments and improvements. In an ideal situation, these pension funds could switch their strategy from analyzing and predicting company results in order to move their investments around, to support these companies on how to innovate and grow their markets, just like a farmer tends to his/her crop. Hey, they even have the capital to finance these long term innovation projects.
The sad thing is that the pension holders who have their 401K in one of those pension funds are currently financing the whole short term thinking circus that is killing their own companies. This creates instability and fear. Companies fire people in order to cut costs and then hire people in different departments to address the problems caused by firing them in the first place. The more instability this causes, the less likely employees are to come up with suggestions to improve, develop new ideas or to support reorganizations.
Small companies and start-ups are the one’s that create a lot of the innovations. These start-ups are often bought and “incorporated” in large organizations, where it quickly becomes clear that their way of thinking and innovating does not fit the company culture and is thus slowly killed.
Is there a way out?
Regards,
Robert Ilbrink