ARTICLE: Time for the pendulum to shift? - Long-termism versus short-termism
Short-termism is viewed as a problem because it has the potential to undermine future economic growth with the lack of long-term investment, ultimately leading to slowing GDP, higher unemployment levels, and lower future investment returns for savers - implications that could hurt everyone.
We are often told to think long-term, keep the big picture in mind, or that it’s a marathon, not a sprint; however, evidence shows it’s not always in human nature for individuals to behave in a long-term-focused manner. Public companies are no different, and in recent years, the debate has centered on the detrimental impact of the short-term mindset of many public companies. Short-termism (a.k.a. quarterly capitalism) is defined as companies’ fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the cost of long-term investment. Short-termism is viewed as a problem because it has the potential to undermine future economic growth with the lack of long-term investment, ultimately leading to slowing GDP, higher unemployment levels, and lower future investment returns for savers—implications that could hurt everyone.
This paper will analyze the short-termism versus long-termism debate, examine how institutional investors are proposing to alleviate short-term thinking, and explore how incorporating long-term metrics is a critical step in this transition to long-termism.
Short-termism does exist; corporate sentiment, investor holding data, and secular trends highlight the short-term pressures that companies face and the tradeoffs that they are making.
• The investment value chain has three key participants: corporations, asset owners, and asset managers. In the past, leaving the burden to companies to deal with short-termism alone has proven to be ineffective, with institutional investors holding shares for shorter time periods and activist investors lying in wait.
• To institute real change, there has to be a paradigm shift. The asset owners who control the capital have the leverage to effect real change.
• A coalition of large-asset owners has realized the need for change and has put forth its recommendations on how the asset owner community can adopt long-termism principles.
• In transitioning to long-termism, an important constant is incorporating long-term metrics. Long-term metrics are both industry specific and sustainability oriented, and they are just as important as GAAP financial measures in following a long-term, value-creation investment process.
• Governance is the sustainable metric that has been viewed by most investors as the most important variable for corporate performance. Governance issues have been at the forefront for a longer period of time, and therefore, investors have a level of familiarity with them that environmental and social issues have yet to match--but they are making strides in catching up.