“Although short-termism may be fueled by investor pressure, it’s equally true that investors select companies for their time frames,” according to recent research by Francois Brochet, George Serafeim, and Maria Loumioti published in the Harvard Business Review.
Short-Termism: Don’t Blame Investors, examined the transcripts of 70,042 earnings conference calls held by 3,613 firms from 2002 to 2008. Their analysis of words and phrases suggesting a short-term emphasis (“next quarter” and “the latter half of this year,” for example) versus those pointing to a long-term view (“years” and “long run”), does suggest that short-termism is rooted in a company’s culture.
The authors found that companies emphasizing the short-term were likelier than others to manage earnings, have stock prices that were more volatile than the market as a whole, and have costs of capital 0.42% higher than average.
Managers can take actions and structure their communications to offset them. They should be aware that to a large degree, they are setting the tone. The language a company uses when talking to investors is a meaningful indicator of its orientation—and the investors listening in on calls that emphasize a short-term approach are a largely self-selecting group who like what they hear.
Takeaway: Don’t let shareowners pressure your company to focus on the next quarter. Boards have control. There is no legal mandate to maximize shareowner value, especially in the short-term. Companies that take a long-term sustainable approach are more likely to attract investors with the same focus.