Don’t Blame Firms’ Troubles on Tyranny of Short Term
One misleading explanation for the problems of American business is the tyranny of the short term. American managers, it’s said, focus too intensely on short-term profits and sacrifice their companies’--and the nation’s--long-term competitiveness.
The argument now is being dusted off by critics who say that hostile takeovers are bad because they further distract managements from the long term. The argument has a plausible and righteous ring, but it’s backwards.
Companies, like people, get complacent when no one challenges them. From the end of World War II until the early 1970s, U.S. managers lived in a dream world. Recessions were infrequent and mild, foreign competition was weak or non-existent and company shareholders were passive. Corporate executives grew self-satisfied and began to believe in their own infallibility. Many companies got sloppy; others embarked on misguided diversification programs. This freedom, not short-term thinking, abetted poor management.
In hindsight it’s easy to condemn many managers for not paying attention to the long term. But managers often did worry about the future. Many executives diversified precisely because they wanted to lessen corporate reliance on a single or mature business. Unfortunately, much of the diversification turned out to be disastrous. Companies got into businesses that they didn’t understand or became unwieldly bureaucracies. Planning for the future is no panacea if the result is bad planning.
The distinction between the short and the long term, which so intrigues management analysts, isn’t especially meaningful in the real world. Executives can have long-term goals, but, like all of us, can’t know the future. Their decisions inevitably reflect present pressures and perceptions. The things that most disrupt business--changes in the economy, technology and consumer tastes--are the least predictable.
In the early 1950s the future computer market was thought to be tiny. A study by Steven Schnaars and Conrad Berenson of the City University of New York reviewed 90 predictions of successful new products between 1960 and 1980; 53% of the forecasts were judged failures. Losers included hang-on-the-wall television sets and home helicopters. Some forecasters simply were overly optimistic. Others were dazzled by new technologies and forgot to ask if products were economical or useful.
The new attention to the alleged short-term bias of managers is an effort to build a case against takeovers. The argument, now made by managers themselves, blames Wall Street. Companies are increasingly owned, it is said, by large institutions such as pension funds. These investors want quick profits. Therefore, managers must boost short-term profits by cutting long-term research or investment. Otherwise their companies’ stock will be dumped or they will become takeover targets. By this view, institutional investors lack company loyalty and will eagerly sell to a “raider” offering a high price.
This argument won’t wash. True, the proportion of total stock owned by institutions (pensions, insurance companies, trust departments) has risen from 16% to 27% since 1970. But individuals still are the main owners, and institutions apparently don’t disproportionately own companies that become takeover targets.
Nor has the threat of hostile takeovers cut investment or research and development. Management expert Peter Drucker, who deplores hostile takeovers, dates their onset to 1980. Logically, then, investment and research should have slumped after that as companies tried to boost short-term profits. In fact, business-financed R&D; rose 34% after inflation between 1980 and 1985. Between 1970 and 1975, when there were no hostile takeovers, it grew a meager 7%. Business investment, as a proportion of gross national product, has been about 10% higher in the 1980s than a decade earlier.
What has happened is that managers have lost much of the discretion that they enjoyed in running their companies in the 1950s and 1960s. The economy has become harsher, foreign competition has intensified and shareholders, through hostile takeovers, are more threatening. Naturally, executives yearn for their former freedom. They can’t easily control the business cycle or foreign competition, but can try to outlaw hostile takeovers. By making Wall Street a scapegoat, they find an appealing public-interest argument for their efforts.
But managers’ interests are not synonymous with national interests. The new outside pressures are having therapeutic effects. More spending on R&D; and investment is a tangible sign of change. It’s not that managers are being forced to focus on the long term. They always thought they were. They’re being forced to defend their companies against concrete threats, and that compels them to lower costs, improve quality and develop new products. They can no longer take success for granted.
The campaign to blame Wall Street for short-term thinking simply is a new version of an old story. Since at least the era of 18th-Century Scottish economist Adam Smith, businessmen have sought to insulate themselves against outside threats. They prefer calm certainty to insecure uncertainty. It’s an understandable longing. Yet a bit of insecurity isn’t so bad. It makes managing tougher--but better.
