The idea that companies face enormous pressure to deliver short-term results at the expense of long-term health is widespread among executives. McKinsey’s Dominic Barton has made the case, as has BlackRock’s Larry Fink. Politicians like Hillary Clinton and Joe Biden have warned against short-termism, as have scholars at Brookings and the American Enterprise Institute. McKinsey has made its case empirically, finding evidence linking long-term management to superior financial performance. In 2015 Rotman’s Roger Martin reviewed the evidence on both sides here at HBR and explained why he believed short-termism is a problem.
But not everyone agrees.
Economist Larry Summers says, in response to the McKinsey data, that the jury’s still out. The Economist calls short-termism a “slippery idea” and a “distraction.” The New Yorker calls it a “myth.” And we’ve published many pieces here at HBR taking issue in one way or another with the standard short-termism critique.
In a recent paper, University of Chicago Booth economist Steven Kaplan makes his own case against worrying about short-termism. What makes his argument novel is that it begins by looking to the past. I called him up to talk about this; what follows is a transcript of our conversation, edited for length and clarity.
HBR: A lot of people think there’s a problem with short-termism in the economy. You’re not convinced. Why?
Kaplan: If you go back 40 years you can find the same arguments from Marty Lipton, and from Hayes and Abernathy in HBR. You can go back 25 years and hear the same argument from Michael Porter. Porter said the U.S. system of allocating investment capital is failing, putting American companies at a serious disadvantage. So this view that U.S. companies are too short-term has been with us for roughly 40 years, if not longer. Relative to 25 or 40 years ago, today is the ”long term” in which U.S. companies should be a disaster.
And so, then the question is: How are U.S. companies doing? The criticism of U.S. companies today is not that they’re doing badly — it’s that they’re incredibly profitable. Corporate profits are at an all-time high, or close, and the concerns people seem to have about corporations are that in some instances they’re too successful.
Is that the right baseline? If we had been more long-term oriented 20 years ago, would companies today be even better off?
First of all, the other countries which were presumably more long-term oriented — Japan, Germany, other parts of Europe — they’re not doing any better than we are. Japan’s doing actually a whole lot worse, so you’d have to tell me who exactly is doing it right and why.
Second, if you thought people were not investing for the long term, and there was a real opportunity to do so, you ought to see some kind of opportunity for people to do that. And the place that I look in the paper is at venture capital. You would think over time that more and more money would be going to venture capital and that the returns would be terrific. Because, again, in venture capital you’re presumably investing in risky, long-term projects. And if you look at how venture capitalists have done over time, and the amount of money going in, the amount of money going in is roughly constant over time. There was a blip in the dot-com boom, but the amount of money invested in venture has been pretty stable as a fraction of the stock market over the last 30, 40 years. And the returns, except for that period in the dot-com boom, have not been spectacular, on average, and have been only slightly better than public markets for the median fund.
If there is no short-termism problem, why do we keep hearing about it?
I think there are some executives who behave in a short-term way. They get into an equilibrium where they tell Wall Street they’re going to generate a certain amount of earnings. When they don’t, the stock price goes down. When Wall Street reacts, the executives blame Wall Street for being short-term. I would say in that case, it’s the management that’s made the mistake, not investors. You should avoid getting into this game of saying I’m going to deliver a certain amount of short-term earnings. You could say: I’m going to do what’s right for the company in the long term, and if you deliver on that, the market sees that.
The best current example is Amazon, which for many years lost money. Amazon’s strategy, however, was pretty clear, and Amazon has been rewarded with very high valuations over time. With biotech stocks, that’s the case as well. If a company has a long-term strategy that makes sense, that maybe has some short-term pain, the challenge for management is to tell that story and convince the market that it’s true.
I also think there are certain situations where you have companies that are not performing and they tell the market they’re going to be good in the long term. But it’s really the case that they’ve got short-term problems, and often long-term ones as well. Executives do not like the fact that the market is telling them they are not doing a good job, just like most people do not like to get bad report cards.
What would convince you short-termism was a real problem?
I think if U.S. companies looked like Japanese companies, or had the experience Japanese companies had for the last 20 years, I would probably be concerned. And the fact is they didn’t. Michael Porter to some extent, and Hayes and Abernathy, said that U.S. companies are a disaster relative to other systems (including Japan) and U.S. companies should be a basket case today. They’re not. If U.S. companies as a whole weren’t doing well, then I would begin to be convinced.