Blog: Short-Term Thinking in a Long-Term World
In my last blog, I asked “Is the right ‘you’ making your decisions?” and suggested that for long-term decisions, we should use the future version of ourselves drawing on the wisdom and perspective that come with experience.
When we talk about management of a company, one of the issues is called “Agency Theory.” This is the conflict that exists between the goals of managers and owners. Managers usually have a short-term focus in their decision-making because they want to maximize their salaries and bonuses (which may be connected to short-term share price), while owners have a more long-term perspective and would prefer that managers have a longer-term perspective as well.
With this in mind, I was just reading an article by Rana Foroohar that made reference to a recent article by Gautan Mukunda in the Harvard Business Review that stated that 78% of CFOs would give up economic value and 55% would cancel a project with a positive net present value in order to meet Wall Street’s targets and to fulfill its desire for “smooth” earnings. The same article by Ms. Foroohar also said, “Unfortunately, in a world in which the average holding period for a stock is about seven months, down from seven years four decades ago, CEOs grasp for the lowest-hanging fruit.”
If shareholders now have a seven-month time frame for investing, it is no wonder that managers are making short-term decisions. So, maybe there is no longer a potential difference in the goals of managers and owners because the owners’ and managers’ goals are the same.
Personally, I see this as just one more indication of the desire that people have for instant gratification, even at the cost of greater benefits in the long-term. It is no wonder that so many countries face problems that need to be addressed by solutions that will take longer than 7 months to implement. Maybe this is an indication that it is time to extend our time frame to something more than seven months.
Are there any examples that you have seen of companies choosing the long-term over the short-term in making their decisions?
Brian Hock, CMA, CIA
