The most serious effect of ‘short-termism’ on corporate decision making is the overwhelming readiness of corporate managers to decrease discretionary spending in such critical areas as research and development, advertising, hiring and training in order to meet their short-term earning targets (John R. Graham et al 2005: 32-36). In fact, extra sales volumes could be generated by lowering product price when the cutting of discretionary expenditures is carried out; however, this implicates the potential adverse longer-term consequences. The choice between growth-maximizing, profit-maximising and shareholder value-maximizing objectives is always controversial issue for many firms. Nevertheless, in reality, when managers are given the alternative of short-term earnings or total cash flow, they are prone to the first one notwithstanding that this alternative may be sup-optimal over the long term. In other words, long-term strategic projects tend to be neglected even though the creation of long-term value is commonly accepted as one of a manager’s fundamental responsibilities. (J B Coates et al 1996: 32; Krehmeyer D et al, 2006: 3)
The other misguidance of ‘short-termism’ is that managers tend to pursue short-term investments when they are given high incentives to perform in the short-run, which ‘largely come in the form of increased fund inflow and asset under management on the upside, and firing on the downside’ (Lijin 2005: 4). As revealed in the result of the CFO survey conducted by Duke University, nearly 90% of respondents admit that their business decisions are often based on tenure considerations (Louis M. Thompson, Jr. 2007). Consequently, asset prices will likely be affected by inflating the price of the most liquid assets, and dampening the price of long-term illiquid assets. Such critical long-term oriented areas as research and development are likely to be ignored because they are less liquid, and hence their prices could deviate even further from their fundamental values, even if they promise to earn high risk adjusted return on capital (RAROC) and real value in the long- term. (Lijin 2005: 4-5)
More seriously, the obsession of near-term quarterly earnings results in a possible damage of longer-term corporate growth. The abuse of short-run financial performance measurements such as earnings per share (EPS), return on investment (ROI), return on capital employed (ROCE), and return on equity (ROE) takes the focus of managers away from long-term performance measurement and shareholder value. (J B Coates et al 1996: 32) Quarterly reports and financial forecasts may be manipulated, in so-called “accounting shenanigans”, to meet corporate earning projections. This action gives an illusion of complete business predictability and misleads their shareholders. To make matters worse, the pressure to meet short-term quarterly earnings numbers can cause unexpected market volatility. This may, in turn, cause management to lose sight of its strategic business model and endanger its global competitiveness. ( 2006)
A typical example of ‘short-termism’ was the collapse of the dot-com market in the early part of this decade. The business world should have learnt some worthwhile lessons about ‘short-termism’ when the ‘dot-com bubble’ finally burst. In the late 1990s, the American media was overwhelmed with dot-com start-up stories about young people with little money and business experience but with an innovative idea controlled the dot-com world. Numerous internet companies are hurriedly established with short-horizon objectives with the illusion of dominating the market in the short run. They adopted daring business practices to maximize growth over profit, assuming that customer base is the prerequisite for success. In the meantime, many investors consider this an invaluable opportunity to make money quickly and, therefore, rushed into purchasing any new dot-come stocks as they came on the market. These investors played a central part in the dot-com phenomenon, pushing up the unrealistic share prices to greater heights. As a result, the whole American stock market boomed during the ‘dot-com bubble’. (S.E. Smith, Red Tiger website)
However, short-termism was proved not to be a compromise for long-term value when the ‘dot-com bubble’ eventually burst in around 2001. A large number of internet companies are brought to court for adapting immoral business policies such as borderline monopolies. The largest communication company in the US at that time - , was found to have used to overstate its profits by billions of dollars. Other communication companies, namely , , , , and , burdened with debts from their expansion projects, had to sold out their assets for cash or filed for bankruptcy. Other dot-com companies ran out of capital and were acquired or . Their domain names were picked up by old-economy competitors or domain name investors. Several companies and their executives were accused or convicted of for misusing shareholders' money, and the fined top investment firms like and millions of dollars for misleading investors.
Obviously, the ‘dot- com bubble’ is only one among numerous examples of corrosive effects of ‘short-termism’ on misleading corporate decision. However, there would be by no means conflict between a short-term investment and a longer-term orientation if firms know how to allocate their funds. In other words, there should be separate funds for long-term oriented ventures such as environmental controls, research and development, which are supported by profits gained from short-term cash generating projects. Long-term strategic projects, in turn, would automatically produce a better short-run performance. Moreover, it is vital that the whole organization lay much stress on a long-term vision to see whether they are on the right track or not (Esbjörn Segelod 2000; J B Coates et al 1996).
In conclusion, ‘short-termism’ is undoubtedly a defective problem for corporate decision making, and companies may be short-lived if they insist in pursuing quick payoffs at the cost of a long-term value. Unless they cease to pursue myopic targets, these firms might not survive to see their fruition.
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