Debate: The Role of Long-Termism and Economic Growth

Earlier this year, together with the McKinsey Global Institute, we co-authored an article in the Harvard Business Review, “Finally, Proof That Managing for the Long Term Pays Off.” Based on an analysis of 615 large and mid-cap U.S. publicly listed companies from 2001 to 2015, it highlighted the benefits to long-termism, including higher corporate earnings growth and overall financial performance, and a greater growth in job creation and GDP (a longer summary is available here).

This generated much thoughtful discussion on the role of long-termism and economic growth from academics, journalists and practitioners alike. FCLTGlobal welcomes this discussion.

First, Larry Summers, a Harvard professor and the former U.S. Treasury Secretary, responded to the report, calling it an “important topic” in the Harvard Business Review. While he remains sceptical of the idea that the capital market is systematically short-sighted, he noted that “if short-termism causes under investment, it will be a cause of secular stagnation,” and would, in turn, have serious corporate governance and policy implications. He calls for the importance of the research in better illuminating the debate, stating it deserves “much discussion, debate, and attempts at replication.”

Second, in The Economist, Schumpeter’s article, “Corporate short-termism is a frustratingly slippery idea,” echoes Summers’ points. Schumpeter agrees that businesses worry about secular stagnation, debt hangovers, and whether demography explains sluggish growth, but disagrees with short-termism. Like many theories, “short-termism fits the experience of some individual business people,” but doesn’t apply to broader economies, he wrote, citing that investor horizons have been three to 12 months since the 1930s, even though markets were making trades that could span decades.

Like Summers, Schumpeter understands executives’ anxiety about missing quarterly earnings, but argues that short-termism is “a distraction.” Instead, he writes, there is another approach to the problem of economic growth: “… incumbents’ fat profits need to fall. Competition policy needs to weaken the entrenched position of established firms and help new entrants. That would make the economy more dynamic, boost wages and end the era of surplus profits that are put to no use.” This message, however, is, in his view, unappealing to CEOs.

Sarah Williamson, FCLTGlobal’s CEO, emphasises the importance of investments that drive prosperity, responding with a letter that The Economist published last week, and copied in full below:

“Schumpeter’s recent column on corporate short-termism suggests that ‘the solution is to prod incumbent firms to invest vast amounts and insulate their managers from investors’ (February 18th). On the contrary, the solutions should be much more targeted to how capital markets really work.

We are exploring two such solutions. One is rethinking the quarterly guidance process to engage managers with, rather than insulate them from, investors in their long-term strategic thinking. The second solution is to change the relationships and incentives between asset owners and fund managers to ensure that the long-term needs of savers and beneficiaries are best served in the investment process.

Short-termism is a real issue that limits investments in human, intellectual and physical capital. Rebalancing the focus away from short-termism towards long-term goals isn’t easy, but making investments that drive innovation, job creation and savings certainly is not, as Schumpeter believes, ’a distraction’.”

To see the more complete media coverage, please visit our media page.

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