Overcoming Short-termism: The Key Issue

Gary Larkin, who blogs for the Conference Board, did a great interview Q&A With Martin Lipton and Richard Ferlauto: Short-termism. (12/09/09) Here’s a snippet on the question, Do you think short-termism played a role in the destruction of long-term shareholder value:

Lipton: Absolutely. Short-termism resulted in financial services companies taking undue risk, more so than in the past. They created more and more leverage. Businesses were generally borrowing on a short-term basis and subjected themselves to a liquidity crisis. Monetary policy created historically low interest rates and too many companies did not resist the “bargain.”

Ferlauto: The time horizons and its parallel investment orientation may be the most fundamental question that investors — especially fiduciaries for retirement funds — face today. Too many investors till think that they are better off with “Make the money and get out [of the market]’ or ‘Make the money now and not care about its longer term repercussions.’ You’re eating your seed corn for short term gains. Many firms are not competitive now because they didn’t make the investments in technology, human resources or internal development that in the long run contributes to wealth creation for shareowners and other stakeholders.

I found it interesting that it is the conservative, Lipton, who sees the solution in direct action by the federal government, while Ferlauto appeals to issuers to work more closely with their shareowners… although in the end Ferlauto also sees intervention by the federal government as necessary, since individual companies aren’t willing to break out of the model on their own.

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