How short-termism destroys businesses

The business press is comfortable discussing the economic incentives created by things like interest rate changes, regulation, or perhaps demographics. It’s not often that a concept as esoteric as time horizon setting is fingered for causing real, concrete harm.

William Galston’s excellent column in The Wall Street Journal outlines the worrying economic implications of c-suite short-term thinking. Feeling self-applied and external pressure to meet quarterly financial targets, American CEOs habitually under-invest in R&D and capital expenditures. Instead, they favour investing net income into dividends and share buybacks.

Human and organizational dimensions to short-termism are just as troubling; the chain of poor incentives it creates cascades beyond corporate offices.

Examples abound in recent months of executives applying extreme pressure on subordinates to meet short-term goals, no more grotesquely than in the innocuous-sounding “going for gr-eight” initiative at Wells Fargo, designed to push each customer into holding 8 separate accounts.

In an institution only recently lauded for avoiding much of the risky behavior associated with the 2008 crash, employees targeted Hispanic immigrants without social security numbers so as to more easily open additional accounts without authorization, placing unwitting victims under collection for unpaid fees on accounts they didn’t know they had.

According to whistleblower accounts, sales staff were threatened with the prospect of having their employment terminated for failing to meet the aggressive targets set by the scheme. Leadership allegedly knew, and didn’t care.

Short-termism isn’t just a financial sector phenomenon. In response to over-optimistic earnings targets billed as “challenge” and extreme pressure to meet them, Toshiba managers engaged in across the board manipulation of financial results – to the tune of $1.2 billion of inflated profits over 7 years.

The drive for results - where's the line?

Ambitious goals are a good thing. Competition and the drive to succeed and surpass is the foundation of corporate America’s success story, but when employees are put in a position of choosing to keep their job or choosing to respect the law, that’s a sign that healthy incentives and competition have been pushed past their breaking point.

Workplace stress is a non-trivial economic issue. The American Institute of Workplace Stress estimates that workplace stress costs companies $300 billion per year in absenteeism, health expenses, and stress management programs. That figure doesn’t include the billions more from reduced productivity and morale, recruitment and training costs for new hires, compensation claims, and litigation.

Given the gravity of the economic and personal toll inflicted by short-termism in the corporate world, attention from Presidential frontrunner Hilary Clinton is most welcome. Governments can’t legislate longer time horizons, nor should they attempt to, but any effort should be encouraged in persuading leaders not to scratch the short-term itch.