The year-end earnings season soon will be underway as our companies line up to parade their results. This year’s earnings reports are expected to be spotty. Forecasters believe that profits will grow spectacularly for companies in the oil business, but meagre gains are more probable in the financial industry. The bigger story lies beneath the numbers, and the lengths to which managers will go in order to meet expectations.
Consensus is growing that the issue of focusing on the short term – an excessive attention on the more immediate mark at the expense of the longer term – is something that must be questioned.
A corporate strategy group listed a set of principles designed to establish again a long-term direction in business decision-making and, consequently, in investing. Many corporations give lip service to sound concepts, but they appear to be ignored for the most part.
The problem seems to be getting worse. William Donaldson, a former chairman of the U.S. Securities and Exchange Commission, and prior to that, head of his investment firm, cited several symptoms of what he called "short-termism." They include increased levels of trading of shares, pay packages based on short-term earnings, reduced terms of office of chief executives, and, all kinds of prodding from professional investors.
As a consequence of this badgering, too much management time is spent on trying to colour expectations in the run-up to quarterly reports. What is so damaging is the fact that this emphasis on the immediate results leads to cuts in long-term investment.
Several years ago, a survey by a group of financial officers showed that a majority of corporate officials were prepared to sacrifice a profitable, long-term project in order to meet some investors’ expectations. Still, North American companies spend more research and development money than do their counterparts in other nations. Yet in view of the soaring outlays for new enterprises in China and other Asian lands, it is inevitable that our long-term entrepreneurial projects are very vulnerable to that competition.
There are a number of remedies. Some, of course, have opted to have their public companies become private so that quarterly results will not be forthcoming. Then also, companies should stop providing “guidance” as to the outlook. A logical reform would be to compel executives to hold shares of their former employer for a period after they have left.
Furthermore, pay packages should be determined by corporate performance. Too often executives receive huge sums despite a dismal record of company results.
In addition, impatience is symptomatic of a North American attitude. This should change, something that would help our economy and reduce the incessant pressure on executives.
