There are days James Pethokoukis, a scholar at the conservative think tank American Enterprise Institute, isn’t quite sure short-termism is the problem.
“When you talk to companies they feel a lot of shareholder pressure to focus on quarterly returns,” he explains. “A lot of companies would rather not have the pressure, but we don’t want to go back to the sleepy capitalism of the ‘80s when Corporate America got fat and happy.”
If corporations aren’t doing enough long-term investing, he adds, that’s not necessarily the fault of investors.
Every company right now has elements of short-termism, says Blair Jones, managing director of executive compensation consultancy Semler Brossy, adding that organizations need to take short-term steps to get to the long term. “The worry is when you’re so focused on delivering short-term results you either take the eye off the ball on some things like quality, or ethical behavior, because you’re just so focused on delivering results.”
“Quarterly capitalism,” Pethokoukis maintains, certainly leads to pressures, and as a result some firms may decide not to go public because of such pressures. The issue, he says, is worth exploring, but in general if companies aren’t investing in the long term they may not be “fantastic machines to invest in.”
Indeed, adds Jones, “Short-termism gone bad” only happens in companies that feed off of short term exclusively. She pointed to Enron as one well-known short-termism casualty because of its ultra competitive culture to deliver every quarter that led to creative and eventually illegal behavior.
But more often than not, it’s less a story about corruption than just a great company that “slowly withers away” because it only focused on the short term, she says.
One printing company Jones worked with was so focused on high dividend yields for shareholders they didn’t invest enough money in moving the organization more quickly to digital.
“They rode the short-term wave too long and couldn’t change fast enough,” she notes.
Another example she offers is a retail apparel company that was an investment community favorite. “It over-leveraged its existing model, opening new stores as well as expanding outlet stores in the U.S., where it was the market leader, to accelerate its near-term growth,” she recalls.
In doing so, however, it failed to
• invest sufficiently overseas, where there was more long-term growth opportunity and
• plan for competition, which was able to steal significant market share.
“The rapid growth in the U.S. and opening of too many stores, and particularly outlets, worked for near term share and dividend growth,” she notes. “But longer-term, it diluted its brand and margin, making the company more vulnerable to the competitive threats and putting them at a disadvantage overseas, where others had started to build better positions.”
Focusing on the short-term above all else, however, can be a smart move if a company is floundering financially and needs a major overhaul.
Jones offers an example of a consumer products company that experienced a major drop in North American earnings. The company’s stock price dropped to historic lows, investors lost faith, and the firm faced regulatory issues.
Management responded with a dramatic restructuring plan that included workforce reductions, the spinning off its North American operations, a cash infusion from a major investor to pay down debt, and the decision to move the company’s headquarters.
“As a result,” she adds, “the company went from close to being on life support to having the ability to rebuild again. Once this period was over, the company could again turn to longer-term thinking and investment, but in the days of the turnaround, ‘the future was now’, and all of their actions were short-term in nature.”
The bottom line, she stresses, “short term can get you to the long term, but you don’t want to ride the short-term wave too long.”