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.
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.
- 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