‘Short-termism’: forever or short-lived?
- Opinion
- August 29, 2022
‘In the long term we all are dead’, said John Maynard Keynes, the legendary British economist. Over time, the markets and finance community have taken this view so seriously that they live only one quarter at a time!
Reporting every 3 months has become second nature to CFOs. Second-guessing market reactions to corporate actions and results, i.e. given the criticality of markets, often decisions are taken that are dictated by short, unrealistic goals. The rhythm is now so set, that CFOs don’t even seem to question the sense (or downside, if any) of ‘quarterly reporting’. In a recently concluded CFO conference in Delhi, I was surprised by the widespread acceptance (resigned in some cases) of a focus on the short term – saying ‘this is the way it is’, ‘investors want it like this’ – and little thought spent on the trade-off with respect to longer-term objectives.
But there is always someone, somewhere who is challenging the status quo. John Kay, a professor at the London School of Economics, has been urging businesses in the United Kingdom to revert to thinking long-term. In his famous report of 2012, warning against ‘short-termism’, John Kay made several recommendations, of which two will warrant reactions from CFOs:
One–stopping the requirement for companies to report quarterly. According to Professor Kay, most of the extra information in three-month updates is not useful for measuring a company’s real progress. These events have descended into a trading opportunity for the here-today-gone-tomorrow brigade with the effect that debate about long-term corporate strategies gets squashed.
And two–ban short-term cash bonuses. What’s the point of them? They didn’t exist 20 years ago and given that unless executives mess up royally, they get extra annual handouts – these have become akin to a salary supplement. Kay’s way is more sensible–any bonuses should be paid in shares and the required holding period should extend beyond the executive’s tenure with the company. In other words: no reward for chasing short-term targets at the cost of a company’s long-term strength.
The United Kingdom has seen some companies respond and opt for moving to less frequent reporting. It’s not easy, specially, when their peers continue to be guided by short-term market rewards. But even now, any step to question the quarterly lens for performance is a mere blip on the global corporate radar.
Against this backdrop, what might inspire individuals and companies to do what’s ‘right’ if it will not show results in the short-term but will deliver rewards later? What does the market really value – and is the market smart and comprehensive enough to guide corporate intent and strategy?
Moreover, what should guide corporations that exist outside the market? Suppose success was not about the markets rewarding you, how would you then as an organisation behave and what would you use to guide your behaviour? Is there a way to build a fraternity that does the right thing despite the fact that the rewards are not going to show up in short-term results? Isn’t this important to consider given how much of economic growth emanates from the small and medium sector?
The thought is nascent, but it is certainly worth beginning a conversation amongst the CFO community i.e. is short-termism short lived or will it continue to dictate our future? At least that’ my bias, but what do you think?
Anuradha Das Mathur, Editor, CFO India
Reporting every 3 months has become second nature to CFOs. Second-guessing market reactions to corporate actions and results, i.e. given the criticality of markets, often decisions are taken that are dictated by short, unrealistic goals. The rhythm is now so set, that CFOs don’t even seem to question the sense (or downside, if any) of ‘quarterly reporting’. In a recently concluded CFO conference in Delhi, I was surprised by the widespread acceptance (resigned in some cases) of a focus on the short term – saying ‘this is the way it is’, ‘investors want it like this’ – and little thought spent on the trade-off with respect to longer-term objectives.
But there is always someone, somewhere who is challenging the status quo. John Kay, a professor at the London School of Economics, has been urging businesses in the United Kingdom to revert to thinking long-term. In his famous report of 2012, warning against ‘short-termism’, John Kay made several recommendations, of which two will warrant reactions from CFOs:
One–stopping the requirement for companies to report quarterly. According to Professor Kay, most of the extra information in three-month updates is not useful for measuring a company’s real progress. These events have descended into a trading opportunity for the here-today-gone-tomorrow brigade with the effect that debate about long-term corporate strategies gets squashed.
And two–ban short-term cash bonuses. What’s the point of them? They didn’t exist 20 years ago and given that unless executives mess up royally, they get extra annual handouts – these have become akin to a salary supplement. Kay’s way is more sensible–any bonuses should be paid in shares and the required holding period should extend beyond the executive’s tenure with the company. In other words: no reward for chasing short-term targets at the cost of a company’s long-term strength.
The United Kingdom has seen some companies respond and opt for moving to less frequent reporting. It’s not easy, specially, when their peers continue to be guided by short-term market rewards. But even now, any step to question the quarterly lens for performance is a mere blip on the global corporate radar.
Against this backdrop, what might inspire individuals and companies to do what’s ‘right’ if it will not show results in the short-term but will deliver rewards later? What does the market really value – and is the market smart and comprehensive enough to guide corporate intent and strategy?
Moreover, what should guide corporations that exist outside the market? Suppose success was not about the markets rewarding you, how would you then as an organisation behave and what would you use to guide your behaviour? Is there a way to build a fraternity that does the right thing despite the fact that the rewards are not going to show up in short-term results? Isn’t this important to consider given how much of economic growth emanates from the small and medium sector?
The thought is nascent, but it is certainly worth beginning a conversation amongst the CFO community i.e. is short-termism short lived or will it continue to dictate our future? At least that’ my bias, but what do you think?
Anuradha Das Mathur, Editor, CFO India