It’s been a long time comin’; gonna be a long time gone

The CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics issued a report that recommended less focus on quarterly earnings. This has something to do with how companies can mess with their financial health and their stock prices and their profits and so on, but also is connected to an underlying cultural orientation in businesses around what they are thinking about. It’s hard to innovate if your only measure of succes (as a manager) comes from the impact on quarterly earnings. Innovation, for example, takes longer than a quarter to show results (often). An article [NB: New York Times Select link, probably requires registration and probably will expire] last weekend got me thinking.

The most shocking thing I heard this week about the bad effects of short-term thinking came from a 2005 study conducted by three economists for the National Bureau of Economic Research. They asked a series of questions about the importance of quarterly earnings to more than 400 executives and discovered that almost 80 percent of them said they “would decrease discretionary spending” in such critical areas as research and development, advertising and maintenance if they needed to do so to make the quarterly numbers.

Campbell R. Harvey, a Duke University economist and one of the authors of the study, still sounded a little stunned by the results when I spoke to him. “You would think they wouldn’t want to admit this,” he said. As he saw it, in the wake of the accounting scandals, companies were less willing to use “accounting shenanigans,” as he called it, to meet earnings projections. So instead, “they are doing things that effect the real operations of the company, like postponing R.& D. This is the stuff that creates real value in the long term.”

So why, even after hearing the horror stories, is there still a part of me that says, “Not so fast?” Partly it’s because for all the anecdotal evidence of short-termism and its effects, there is not a lot of empirical data to back it up. Corporations, for instance, still do a great deal of research and development – $250 billion worth each year, according to Baruch Lev, the well-known accounting professor at New York University.

Mr. Lev scoffs at the notion that short-termism is even a problem. “It would be ludicrous to tell managers, ‘we’re going to leave you alone for five years and then come back and monitor your performance,’ ” he said. “Even if you are long-term oriented, you are going to look at how they are doing every quarter.”

The second reason, though, is that as I listened to Mr. Donaldson and the others, I couldn’t help thinking back to the early 1980’s, when the executives themselves made the exact same arguments Mr. Donaldson was making from the podium.

Let’s be honest here: for many of the executives back then, the argument that they were managing for the long-term was bogus. There was too much lethargy in too many companies, and a desire by too many executives to avoid making tough decisions – cutting loose unprofitable divisions, for example. Having sailed through the post-war era without much in the way of global competition, there were plenty of American industries that desperately needed to be shaken up in a tougher, more competitive era. Whatever their flaws, the raiders helped spur that process – in no small part by forcing executives to pay more attention to the stock price.

Ms. Browning of Merrill Lynch told me that she thought “the pendulum has swung too far in terms of focusing on the quarter.” I agree with her. That’s what often happens on Wall Street – and, indeed, in business. We swing from one extreme to the other.

So yes, by all means: let’s get rid of earnings guidance, and start paying executives for achieving important long-term strategic goals that will help the company grow and prosper into infinity. Those are worthy suggestions. But let’s not swing the pendulum back too far.

Surely we’ve learned by now that long-termism can be just as much a problem as short-termism.

Elsewhere in the papers was this piece about The Long Now Foundation and their 10,000 year clock. The interesting bits deal with the notion of long-term thinking

Anyone who thinks about the clock for a while knows that the chances of this project surviving for 10,000 years aren’t particularly good — and it has nothing to do with the physical design. Rose talks about an engineer from India who, after a presentation on the clock, suggested that in 3,000 years future societies would be sacrificing a virgin on the thing — which would gum up the works and end everyone’s hard work.

“My response was, ‘Before you walked into this room, you weren’t thinking 3,000 years into the future, so it’s already worked,’ ” Rose says. “The short-term goal is to change the conversation. It’s a piece of theater, but when you take something seriously enough to actually build it, you go beyond just the conversation and allow a lot of other people entry into that thought process.”


The clock project makes more sense if you just ask individuals to explain why they got involved…

“I’d pour my life for six months into a project, and then at the end of the six months people would look at this marketing material, and then it was basically worthless after that,” says Rose, who worked for video game companies before Long Now. “(After talking with Brand) I just couldn’t get this project out of my head. There were a lot of dot-com startups at that time and that was one direction I could have gone, but this is the project that seemed like it mattered.”

I find this personally relevant as a business owner and as a consultant in the areas of design/strategy/product development. It’s tough going when the economic climate is short-term oriented, because much of the work I do deals with longer-term stuff. When no one is willing to think that way, it’s harder to find work, and the methods and stories get shifted towards the short-term-wins. Yes, that’s important for business, but it’s not everything. On the other hand, it’s easy to feel that short-term fear taking over in one’s own financial worries and impacting the risks one is willing to take. Throw in war, terrorism, global warming in our face, and it’s not so clear what the wise view really is!


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