There has always been a lot of focus on quarterly earning reports, but given the current economic environment, this corporate ritual has come under even greater scrutiny. Everyone is trying to read the crystal ball and figure out what every little detail means. Sales are down 30% when compared to the same quarter but are 5% higher than analysts expected. Profits have plummeted 40%, but when compared to others in the industry, the company is holding up relatively well. What does it all mean?
This focus on quarter-by-quarter results seems wrong to me. Everyone is focused on the organization’s short-term performance instead of the long-term value. I understand that companies must do what is necessary to survive the current recession. But those companies that aren’t in jeopardy of extinction, yet sacrifice long-term goals in exchange for this quarter’s earnings, are making a huge mistake.
What drives this quest for short-term results? Everything or I should say EVERYONE.
Let’s start at the top of an organization and work our way down. Shareholders want to see a return on their investment, and they want to see it now. Where once people invested in blue chip stocks and were satisfied with a strong return over a number of years, now everyone wants to catch that shooting star.
In recent years, we as investors became obsessed with initial public offerings (IPOs) because they held the potential for big gains in a relatively short period. We’ve seen the emergence of day traders who are in and out of the market, well, on a daily basis.
We’ve seen tech companies, with little or no revenue and certainly no profit, garner incredibly high valuations. And we’ve seen the enormous rise of private equity because investors were no longer just satisfied with the returns they could get in the publicly traded companies. So we as investors are to blame for much of this short-term focus.
But the blame doesn’t stop there. The boards of directors of these companies also are to blame. They’ve allowed this obsession with short-term results to dictate decision-making at every level of the organization. The board either approves of a plan that focuses only on short-term results or allows management to act only for short-term gain despite a long-term plan for the company.
The compensation committee structures pay and incentives that focus only on quarterly and annual results. Instead of advocating for long-term value and convincing shareholders that it is in their best interest, they cave and become part of the problem.
Management and employees aren’t without blame either. Bonuses and options are being awarded based on short-term performance hurdles. Their attention is focused on achieving the current quarter’s financial goals. The average tenure of an employee, at any level in an organization, is much shorter than what it was a generation ago. Therefore, employees aren’t all that concerned about what might happen to the business over the long haul because it’s unlikely that they’ll be part of the company down the road. A “what have you done for me lately” attitude is common in management and employees alike.
Our entire society is increasingly demanding instant gratification, and shareholders, board members, and management in public organizations are no different. They all want the money and they want it now. But can this focus on the short-term be healthy for any organization? I don’t believe it is.
When times are tough, as they are now, it is easy to abandon long-term initiatives to make the current quarter’s numbers. If we lay off 10% of our workforce, we can show better profitability today and get a bounce in our stock price. If we cut research and development, it will improve the bottom line, and we can make it up later. Let’s slash our marketing budget to cut costs and boost net income. All of these moves are applauded by the business media and rewarded with a rising stock price — today.
But these very decisions are killing the company’s future. That reduction in force leaves the business without the people necessary to execute the ideas of tomorrow. The cut in R&D puts the company years behind its competitors or where it would have been had it sacrificed today in order to ensure a better tomorrow. Slashing marketing to make this quarter’s projections instead of grabbing market share while your competitors are pulling back is shortsighted. You’ll pay for these sins down the road.
Maybe tomorrow doesn’t matter any more. The investors will have sold their shares, the board will have turned over and it will be someone else’s problem, and management members will have cashed in their options and moved on. And a once proud institution will wither away having had all of the promise and value sucked out of it for a short-term gain. Call me old-fashioned, but I think it’s a crying shame.