The impact of corporate short-termism

Wednesday, 01 March 2017


    The debate around corporate short-termism and its impact on company performance has been ongoing in business, government and academia for many years.

    The economic impact of short-termism

    Motivated by a scarcity of substantial evidence about the effect of short-termism on company performance and economic growth, McKinsey & Co created the five-factor Corporate Horizons Index, a systematic measurement of long- and short-termism at the company level. The Index enabled McKinsey to “separate long-terms companies from others and compare their relative performance.” The subsequent discussion paper, The Economic Impact of Short-Termism, suggests that “long term” companies outperform their shorter-term peers on a range of key economic and financial metrics.

    The Index uses a data set of 615 large- and mid-cap US publicly listed companies from 2001 to 2015 and is based on patterns of investment, growth, earnings quality, and earnings management. The findings from the Index include:

    • From 2001 to 2014, the revenue of long-term firms cumulatively grew on average 47 per cent more than the revenue of other firms, and with less volatility. Cumulatively the earnings of long-term firms grew 36 per cent more on average over this period than those of other firms, and their economic profit grew 81 per cent more on average.
    • Long-term firms invested more than other firms from 2001 to 2014. Although they started this period with slightly lower research and development (R&D) spending, cumulatively by 2014, long-term companies on average spent almost 50 per cent more on R&D than other companies.
    • Long-term companies exhibit stronger financial performance over time. On average, their market capitalisation grew $7 billion more than that of other firms between 2001 and 2014.
    • Long-term firms added nearly 12,000 more jobs on average than other firms from 2001 to 2015. Had all firms created as many jobs as the long-term firms, the US economy would have added more than five million additional jobs over this period.

    McKinsey states that while the findings are by no means the final word in the debate on corporate short-termism, they do raise further questions.

    “This discussion document constitutes a first effort to measure short-termism systematically at a company level, assess how it has changed over time, and quantify its effects on corporate financial performance and macroeconomic growth.

    “Our findings – that short-termism is rising, that it harms corporate performance, and that it has cost millions of jobs and trillions in GDP growth – are sobering. Companies and governments should begin to take proactive steps to overcome short-term pressure and focus on long-term value,” the firm said.

    Code aims to attract foreign investment

    The Philippines Securities and Exchange Commission (Philippines SEC) and the World Bank’s International Finance Corporation have announced a new governance code for publicly listed companies in the country.

    The code, which came into force at the start of 2017, aims to improve company competitiveness and attract foreign investment. It also plans to improve the functioning of boards, strengthen shareholder protection and promote full disclosure in financial and non-financial reporting.

    The code adopts a “comply or explain” approach that combines voluntary compliance with mandatory disclosure to address “perceived overregulation” of the Philippines SEC.

    “The new code is intended to raise the corporate governance standards of Philippine publicly listed corporations to a level on par with their regional and global counterparts,” says Philippines SEC chairman Teresita Herbosa.

    All publicly listed companies are now required to submit a new manual on corporate governance to the Philippines SEC on or before 31 May 2017.

    Gender equality: Taking stock

    More than 75 per cent of CEOs include gender equality in their top ten business priorities, but gender outcomes across the largest companies are not changing, according to research conducted by the Wall Street Journal.

    It found that corporate America promotes men at 30 per cent higher rates than women during their early career stages and that entry-level women are significantly more likely than men to have spent five or more years in the same role.

    With growing attention from business leaders and the media on gender inequality and the need to do things differently, the research suggests many companies fall short in translating top-level commitment into a truly inclusive work environment.

    It attributes this to the fact that even when top executives say the right things, many employees don’t see those words backed up with action, don’t feel confident calling out gender bias when witnessed and still don’t think frontline managers have understood the message.

    In a survey of more than 130 companies and over 34,000 men and women, it was revealed that:

    • Companies have been trying to apply the same playbook of programs and policies for more than a decade with the vast majority of companies having flexibility, mentorship, and parental-leave programs. Despite these efforts, only 45 per cent of employees think their companies are doing what it takes to improve diversity outcomes. The younger generation is even less confident – with only 38 per cent of entry-level women thinking their company has a good handle on gender diversity.
    • There’s a gap between what companies think they do and what people experience day-to-day. For example, more than 70 per cent of companies say they are committed to diversity, but less than a third of their workers see senior leaders held accountable for improving gender outcomes. Over 90 per cent of companies report using clear, objective criteria for hiring and promotions, yet only about half of women believe they have equal opportunities for growth at their companies.
    • Men and women, in all roles, shy away from calling out gender bias when it occurs. Less than a quarter of employees see their managers regularly challenge gender-biased language or behaviour. People aren’t having the courageous conversations.
    • Change does not happen without the full engagement of frontline leaders. These are the plant managers, regional sales leaders, store managers, team coaches, and general managers who make companies tick. Today, only 9 per cent of employees see managers recognised for making progress on gender-diversity goals. Less than half of all workers see managers taking advantage of the diverse strengths of their teams which means that managers are either not getting the message or don’t know how to manage differently.

    In response, McKinsey suggests:

    • Focusing on areas that includes creating fair, “first promotion” experiences and developing more holistic family-leave programs that incorporate longer leave options, systematic on boarding back into roles, and tracking of promotion and attrition one to three years post-leave.
    • Fresh, bold thinking that incorporates flexibility into every role.
    • Courageous leadership that confronts blind spots with respect to gender, and sees leaders communicate openly so they help to shift the dialogue.

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