The Real Reasons Companies Are So Focused on the Short Term (1)
This has been a remarkable year for the markets. The S&P and the Dow indexes are up 18% and 19%, respectively. But this run-up isn’t based on solid business foundations. Quarterly profits have only increased 5% since 2012, but investors’ valuations of those profits (as measured by earnings per share) has increased 59% over the same period. What’s behind the disconnect? Some argue that profits are stagnant because of short-termism—that decades of focusing on current profits over long-run innovativeness has resulted, now, in companies that are hollowed out.
Indeed, a study by Rachelle Sampson and Yuan Shi found that company short-termism is negatively correlated with innovativeness, measured as RQ (“research quotient,” a measure of the return on R&D investments). Investors punish companies with a short-term orientation by applying higher discount rates to them, which increases the cost of capital for those companies. In contrast, companies with a long-term orientation are rewarded with a lower cost of capital, which allows them to afford more innovation—a virtuous cycle.
Most attempts to combat short-termism are flawed because they focus on changing CEO behavior through some combination of pleading and incentives. While well-intentioned, these efforts fail to recognize that CEO behavior is largely by firm structure. In particular, there are three widespread, interrelated structural trends that have fostered short-termism and reduced corporate innovativeness: increased hiring of outside CEOs (particularly from the late 1980s through the 2008 recession); the decentralization of R&D (over a similar time frame); and a focus on the “development” side of R&D rather than the “research” side. Below, I’ll expand further on these trends and explain how reversing them would reduce short-termism and revive growth.
Instead of hiring outside CEOs, hire insiders—or at least CEOs with domain expertise.
One trend that has contributed to short-termism and lower innovativeness is the increased prevalence of outside CEOs. From 1970 to 2004, the percentage of CEOs hired from outside the firm increased from 12% to 39%.
While outside CEOs are valued because they bring new perspective, my colleague, Trey Cummings, and I believe they impose a hidden cost to innovation at firms whose growth derives from R&D (roughly 49% of firms). We came to this conclusion through interviews with CTOs across a range of industries, which we conducted as part of an to identify factors explaining differences in firms’ RQ.
A recurring theme in those interviews was bemoaning major changes in R&D strategy that occurred as a consequence of new, often outside, leadership. In these stories, firms shifted from an orientation of “R&D as a driver of growth” to “R&D as an expense.” What was reported to happen as a consequence of this shift was a steady decline in firms’ R&D intensity (R&D/Sales) and a corresponding decline in firms’ R&D capability. In other words, the new leader’s disinvestment cut meat as well as fat.
确实如此，Rachelle Sampson与Yuan Shi的研究表明，通过衡量RQ (研发除数，用于衡量研发支出的回报)发现企业的短期主义与创新力呈负相关。而投资者惩罚企业的短期倾向则是通过更高的贴现率，从而增加其资本成本。相反，有长期倾向的企业则拥有更低的资本成本，从而能负担更多的创新，这是个良性循环。
造成短期主义降低创新的原因之一就是外聘CEO的风潮。从1970年到2004年，外聘CEO的比例从12%增长到39%。 外聘的CEO备受重视的原因是他们带来了新的视角，我和我同事Trey Cummings 一致认为，对于研发驱动增长的公司（大约49%的公司）来说，他们施加了一个隐形成本在公司的创新中。我们达成这个结论是通过与许多行业技术总监的访谈，这也是NSF研究的一部分从而找到不同的因素解释公司间RQ的差距。