Don’t Let the Short-Termism Bogeyman Scare You

HBR, Jan 2021

  • It’s already a cliché that the focus on short-term is detrimental to long-term results. It doesn’t require an IQ above 70 to criticize greedy managers only focused on their bonuses at the expense of poor shareholders.

  • Lots of tools exist to protect the corporate managers [MK: I’m allergic to the word “leader(s)”] from the cleansing almost guaranteed by the buyer / majority or loud shareholder thinking they can turn the company around and unlock shareholder benefits: staggered boards, takeover defences like poison pills, dual-class share structures and dual-class recapitalization.

  • The assumption that investors undervalue long-term company prospects and thus share prices don’t include them to the full extent is arguably not based on any convincing evidence. [MK: the currently present huge P/E’s in the stock market prove otherwise, actually. Yes, it’s speculation first and foremost, but still.]

  • HBR agrees with me saying that growth companies would’ve been discounted (vs pumped up) had the investors been looking only at the short-term results. [MK: and the presence of the eternally money-losing firms (Uber, Airbnb, etc.) would be unthinkable.] And yet growth stocks are trading at higher prices now and lower discount rates than a prudent growth investor would predict.

  • The article makes an obvious argument of Amazon and Netflix – the two amazing companies artificially lowering their profitability at the expense of self-funded growth. [MK: suffice to say that there’s a world of a difference between companies that have a clear path to the desired profitability and those which don’t.]

  • But it is true and helpful for all corporate managers to understand that if the stock market doesn’t reward the firm with the increasing share price – there’s something wrong with the firm’s long-term prospects, its management or the business (or all three), not that the investors are collectively ignorant.

  • The mainstream thinking about activist investors is that they prioritize short-term results vs long-term, and that after the company’s governance becomes more shareholder-friendly (AKA delivering higher payouts via stock price appreciation or a dividend stream), its long-term prospects (reflected in the share price) become dim, but the raiders are happy. The article makes a point that while this is a compelling argument everyone would agree with, there’s no evidence to back it (i.e. there’s no significant impact on the share price 5 years after the intervention).

  • Another questionable (in the view of HBR) point is that under a takeover threat firms boost their short-term results supposedly at the expense of the long-term results in order to make the acquisition more expensive; the market participants are ignorant enough not to recognize the long-term damage.

  • Yet another claim the article makes is that a prospect of hedge fund activism makes corporate managers move faster and do more things as they get under the spotlight – thus enhancing shareholder value. This is most definitely true in the short term; not sure what long-term effect on the morale this creates.

  • The common view is that long-term investors are good and short-term investors are bad (no loyalty, focus on the short-term results, flip and run, etc.). The article makes a claim that even the long-term investors (e.g. index funds) should routinely review the performance of assets under their management and suggest governance changes if need be.

  • Activist investors need long-term investors’ support to bring about the needed changes, and they need to provide a compelling argument why an intervention is needed. Long-term investors can benefit from such interventions if this means better governance (which is long-term) and corporate managers’ performance.

  • Corporate managers supposedly pay too much attention to quarterly results (and the resulting stock price movement) because their compensation (cash and stock) depends on them. In 2021 it looks like a straw man argument, as a lot of modern compensation plans are leaning towards the long-term incentives, thus making short-term cash gains less attractive.