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l Project on Public Trust in Business l
Short-termism
Short-termism refers to the
excessive focus of some corporate leaders,
investors, and analysts on short-term, quarterly
earnings and a lack of attention to the
strategy, fundamentals, and conventional
approaches to long-term value creation. An
excessive short-term focus combined with
insufficient regard for long-term strategy can
tip the balance in value-destructive ways for
market participants, undermine the market’s
credibility, and discourage long-term value
creation and investment. Such short-term
strategies are often based on accounting-driven
metrics that are not fully reflective of the
complexities of corporate management and
investment.
"Short-termism cuts across an
enterprise and results in management
actions—including reductions in research and
development, and the forgoing of strategic
investments — all in order to make the quarterly
number,” said
Dean Krehmeyer, executive director of the
Business Roundtable Institute for Corporate
Ethics. “The reforms needed to address short-termism
must be multifaceted, involving the many
stakeholders who participate in capital
markets.”
 In
July of 2006 the CFA
Centre for Financial Market Integrity and the
Business Roundtable Institute for Corporate
Ethics issued a report,
Breaking
the Short-term Cycle, which called on
corporate leaders, asset managers, investors,
and others to break the “short-term obsession”
harming shareholders’ interests by reforming
practices involving earnings guidance,
compensation, and communications to investors.
The report outlines five broad
areas of recommendations:
-
Reform earnings guidance
practices:
Companies need to reconsider the benefits
and consequences of giving earnings guidance
and make adjustments to their involvement in
the “earnings guidance game” that best
reflect shareowners’ interests.
-
Develop long-term incentives
across the board:
Compensation for corporate executives and
asset managers should be structured to
achieve long-term strategic and
value-creation goals.
-
Demonstrate leadership in
shifting the focus to long-term value
creation.
-
Improve communications and
transparency:
More meaningful, and
potentially more frequent, communications
about company strategy and long-term value
drivers can lessen the financial community’s
dependence on earnings guidance.
-
Promote broad education of
all market participants about the benefits
of long-term thinking and the costs of
short-term thinking.
The Institute
continues devote attention to the issue of
short-termism in its research and, in
partnership with other leading organizations, to
promote a dialogue aimed
at advancing solutions to the value-destructive
behaviors associated with short-termism.
About the Business Roundtable
Institute for Corporate Ethics
The Business Roundtable Institute for Corporate
Ethics is an independent business ethics center established in
partnership with Business Roundtable—an
association of chief executive officers of
leading corporations with a combined workforce
of more than 10 million employees and $4.5
trillion in annual revenues—and leading
academics from America’s best business schools.
The Institute brings together leaders from
business and academia to fulfill its mission to
renew and enhance the link between ethical
behavior and business practice through executive
education programs, practitioner-focused
research and outreach.
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