Breaking the Shackles of Short-termism

 December 18, 2012

Until recently, sociologists trained in the tradition of Wright Mills have assumed western economic elites to be rather monolithic in nature. Not anymore. According to The Economist (“Taking the long view”, November 24th, 2012), CEO’s like Paul Polman of Unilever or management experts like Roger Martin, Dean of the Rotman School of Management of the University of Toronto, are attacking the basic principle of neoliberalism: the pursuit of shareholder value.

For Polman, the idea that global companies should primarily be concerned with maximising return to shareholders is out of date. Martin calls it a “crummy principle that is undermining American capitalism”. And Georg Kapsch from the Federation of Austrian Industries has urged the business world to abandon it.

In truth, the ill effects of this theory are there for all to see. In order to increase their pay, managers have resorted to manipulating share prices. The time average investors hold on to shares has decreased from 8 years in the 1960’s to only 4 months in 2010. More alarmingly, however, is the fact that listed companies have invested only 4 percent of their total assets in research and development, which compares poorly with the 10 percent or more invested by privately-owned companies.

Not surprisingly, smooth operators like Warren Buffett or giants like IBM systematically refuse to provide investors with short-term earnings guidance. Big French companies prefer to bribe investors with bonuses if they hang on to their shares for longer than a few months, and up-and-coming entrepreneurial corporations like Google and Zynga have put in place defences such as dual-class voting structures so as to avoid investor pressure for short-term results and cuts to their R & D budgets.

According to The Economist, the solution to short termism is not to abandon the principle of maximising shareholder value, but to follow the advice of business guru…Bill Clinton, who in Delphian manner said “mend it, don’t end it”. Real experts, however, seem to favour the Chinese saying that if a principle doesn’t work anymore, it should be replaced with one that does.