© Norman Sperling, October 15, 2014
The short-sightedness of focusing on the quarterly bottom line distracts businesses from far-more-important long-term affairs. Pascal-Emmanuel Gobry, a Paris businessman, points this out in “The Week”’s “Idea Factory” column. http://theweek.com/article/index/269688/this-one-reform-could-fix-the-bi...
He is profoundly correct. Practically all staff, decision-makers, products, manufacturing facilities, distribution systems, and customers last more than 3 months. A great many of today’s ills would fix themselves if business thought longer-term.
Some businesses do. Family-owned businesses think by the generation, not by the quarter. Most of them are far more stable and deal with their staffs, suppliers, and customers more dependably. That dependability is a big component in deciding who to do business with. But family businesses have other problems, such as not always producing all the needed skills every generation.
Privately-held businesses don’t have to focus on quarterly bottom lines, either. Sometimes, when a publicly-traded corporation is “taken private” they comment that this lets them consider longer-range projects.
Gobry suggests freezing investments held by third parties for 15 years, forcing money-managers to think that long. A more flexible way to encourage thinking long would be to limit the number of times each share of stock could be bought or sold per unit of time. Count by 40 to 60 years rather than 15, but permit a few sales in that time. It would slow down the “instant gambling” aspect of the stock market, which is one of its worst characteristics. It would force investors to think long, but still allow changes if there’s a big enough reason.
Gobry says that quarterly bottom line reckoning wasn’t intentionally planned, it just happened. That’s not quite right. More than a century ago, information about transactions and accounts flowed so slowly that no one could tell a company’s status at any specific moment. This offered many opportunities for fraud. Especially damaging frauds were perpetrated by the Swedish “Match King”. (For his exciting career, read Frank Partnoy’s 2009 book "The Match King: Ivar Kreuger".) To squelch some kinds of his frauds, the US set up the Securities and Exchange Commission in 1934 and required quarterly reporting of each corporation’s cash status and value. That began the quarterly bottom line.
Peter Drucker pointed out that “what gets measured gets managed”, so managers and stockholders concentrate on this important statistic. It dominates the shortest-sighted, like Carl Icahn, who thinks corporations are worth breaking up for his quarterly gain, never mind the disruption wrecking innocent customers, employees, suppliers, and communities.
Corporations should be made to declare the time-horizon they plan for. Those that expect to be long-term on-going enterprises should specify that they plan ahead 20, 30, 40, or however many years. Ones intended to flare up and sell out quickly, like those pushing this month’s technology innovation, should declare that that is their intent.