Short-Termism: Causes and Disadvantages of Short-Termism

Short-termism is a focus placed on results produced in the short-term. Also known as quarterly capitalism, short-termism is defined as meeting quarterly earnings and goals at the expense of long-term investment. Short-termism creates pressure to produce results on a quarterly or short-term basis, while neglecting the much-needed long-term strategies, investments, and developments needed for long-term success.

Companies dealing with short-termism will often focus on being successful in the moment, reduce spending on research and development, and neglect investing in the future.

An example of short-termism might include a farmer who has sold off farmland to enjoy the benefits of less overhead and more money in the short term. However, a farmer could choose to wait to sell the land until it produces corn—if he sells the farmland now, he won’t enjoy the long-term benefits in the future.

New technologies, market volatility, and an increased role of institutional investors all cause short-termism. Reduced transaction costs and reduced trading can also cause short-termism in business.

Corporate America short-termism often occurs due to pressure in financial markets. Shareholders and investors cause short-termism when they become overly focused on short-term profits and shareholder value. Companies that provide quarterly earnings guidance to shareholders are susceptible to short-termism because they are trying to appease a board of directors with constant growth. In recent years, some companies have opted to provide annual assessments to long-term investors.

Generally speaking, short-termism focuses on short-term gratification while long-termism places an emphasis on longevity. Here are a few more differences:

1. 1. R&D spending: Companies focused on long-term performance instead of short-term thinking focus on decision-making for future growth. Instead of forgoing investment opportunities, companies choose a long-term approach and focus on research and development (R&D) spending, capital investment, and other long-term goals.
2. 2. Strategy: Companies need to have strategies in place to survive disruption and to be poised for long-term growth. Companies without long-term strategies are not prepared to adapt to changes in any industry.
3. 3. Workforce development: A company focused on long-termism will position its workforce to succeed with development programs that include education, technology improvements, and more. Companies focused on short-termism will ignore investing in its technology, employees, and other areas needed for long-term growth.

Short-termism hurts public companies, business leaders, and employees. Here’s a few disadvantages of short-termism:

1. 1. Short-termism creates fewer jobs. Companies focused on the short-term likely aren’t hiring new employees or investing in the ones it has. McKinsey found that companies could create five million jobs if they engaged in long-termism.
2. 2. Short-termism harms economic growth. Short-termism is all about quick financial returns. Companies focused on long-termism enjoy revenue growth, higher earnings, and a higher level of economic profit. Short-termism companies grow at a slower rate than long-termism companies.
3. 3. Short-termism hurts the ability to survive financial crises. Short-termism organizations are not prepared to grow and adapt to future changes in the economy. On the other hand, companies focused on long-termism can rebound faster and have stable earnings.
4. 4. Short-termism leads to pressure over quarterly earnings. According to different studies, business leaders are under a lot of pressure from board members and investors to meet short-term quarterly goals. This pressure incentivizes business leaders to focus on short-term goals instead of long-term successes.
5. 5. Short-termism leads to more buybacks to boost short-term performance. Corporate America will repurchase its own stock to boost its numbers in the short term. These buybacks return money to shareholders but happen when a corporation misses its short-term earnings target.
6. 6. Short-termism doesn’t plan for sustainability. Taking action against climate action now is likely going to cost significantly less than working on it in the future. Short-termism doesn’t incentivize immediate action on sustainability, which can make people and companies more vulnerable in the future. Sustainability actually leads to long-term economic benefits as it strengthens the brand’s reputation and infrastructure.
7. 7. Short-termism hurts corporate managers. Placing pressure on short-term goals puts undue pressure on corporate managers. This can lead to employee burnout and high turnover. Some companies will fire corporate managers for poor performance, which makes the workplace atmosphere suffer. In turn, the company must pay more to deal with hiring and firing workers—not to mention the costs of losing a good reputation, knowledge, and hard workers.
8. 8. Short-termism focuses on short-term stock price. Hedge funds, mutual funds, and other corporate companies focused on short-term stock prices may take more risks to boost the stock prices quickly. Relentlessly pursuing corporate growth in the stock market is a volatile strategy, especially as stock market bubbles can burst.

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