Our modern madness!
We live in an era that is addicted to short-termism. Largely, I’m bound to say, brought on by the financial services industry. Yet the influence of that same industry is enormous and percolates its way through most levels of most societies in most cultures and, without question, through the societies of most European and North American countries. One only needs to reflect on the critical importance of gaining and maintaining financial solvency for individuals. From having the creditworthiness to finance, and eventually pay off, a mortgage on a private dwelling, to accumulating a pension to provide some level of comfort in the ‘senior’ years and along the way managing to bring up children, have the odd vacation or two, and enjoy a small luxury or impulse purchase. So for the great majority of us it is practically impossible to live a life that doesn’t interact with banks, savings plans, building societies, pension providers, and often many other financial and investment companies.
Thus the financial services industry is an intimate part of the majority of the lives of private citizens in the ‘Western world’. Yet, ironically, my sense is that the majority of those same private individuals run their lives quite differently. I have in mind what might be called planning horizons.
Clearly buying a home is the most obvious example of long-term planning. But there’s a myriad of other involvements that we sign up to that require, nay demand, a long-term perspective. Having a family, studying for a degree or a post-graduate academic qualification, becoming an apprentice, driver’s licence, heavy goods vehicle (HGV) licence, saving for a pension, for a vacation, working in a company, or similar, with an eye on longer-term promotion and career advancement. I’ll stop there for I’m sure my point is clear!
In my trawl across the internet looking for supportive examples, I came across a paper published by the Aspen Institute called “Short-termism and US Capital Markets”. This institute declares on their website (in part) that “The Aspen Institute is an educational and policy studies organization based in Washington, DC. Its mission is to foster leadership based on enduring values and to provide a nonpartisan venue for dealing with critical issues.”
This US-based institute published the paper on short-termism in view of “the serious consequences they see for both investors and society at large.” The report refers to research by JP Morgan that is highly critical of the present-day love affair with short-term results: “[the research] indicating that a focus on quarterly earnings in US companies in order to show short-term profits is leading public companies to defer spending on marketing research, product design and prototype development and this reduction in investment is causing problems.”
If there’s one relatively recent event (I use the word “recent” in relation to the period when writing this book) that shows, dramatically shows, the madness of short-termism then it has to be the financial crisis of 2008. (As an aside, the term financial crisis seems an inadequate phrase when one considers the full range of negative consequences that blasted into the faces of millions of people in 2008.)
The Boston College Law School held a symposium in 2011 that led to a paper being published by Kent Greenfield, Professor and Law School Research Fund Scholar at Boston. That paper is available to read online. It carries the title: The Puzzle of Short-Termism. I think a few quotations from that paper will underline the madness that came to light post-2008 and that appears to still be with us. The paper opens, thus:
When pondering the question of the “sustainable corporation,” as we did in this symposium, one of the intractable problems is the nature of the corporation to produce externalities. By noting this characteristic, I am not making a moral point but an economic one. The nature of the firm is to create financial wealth by producing goods and services for profit; without regulatory or contractual limits, the firm has every incentive to externalize costs onto those whose interests are not included in the firm’s current financial calculus.
Not much further on, Prof. Greenfield writes:
The more difficult kind of externality to address—especially if our focus is on the sustainability of the corporation—is the future externality. What I mean here is the kind of cost that a corporation’s management can externalize to the future. From management’s perspective, the future is a much more attractive place to push off costs. Stakeholders who must bear such future costs will be less aware of those costs than current costs, and even if they do learn of such future costs, they will be less able to gain the attention of regulators.
Then he offers this stark analysis:
If one is worried about the sustainability of corporations from an environmental, social, or political perspective, the problem of “short-termism” has to be a central worry. This is because, at least according to many who have thought seriously about the topic, in the long run the interests of corporations conflate with those of society as a whole. (For the sake of this Essay I will assume this to be the case, though I have stated some disagreement elsewhere.) Short-termism is a problem whether we focus our attention on the sustainability of the corporation or the ethics of its management.
Short-termism is also costly economically, since the economy as a whole benefits when companies have a long-term strategy. The economy is a summation of the fortunes of the millions of companies and individuals that make it up; if most companies make decisions that prioritize the short-term at the expense of the long-term, we all suffer. A nation’s wealth grows more over time when companies invest for the future and maintain their viability as a going concern.
Just one more extract from the paper, that without the preceding extracts would not have carried the weight and gravity that struck me, and I hope strikes you, dear reader when you read the following:
The financial crisis of 2008 brought into sharp relief the economic costs of short-term management. Among the competing theories on the cause of the financial collapse—the over-dependence on derivatives, the overuse of leverage, the culture of greed and entitlement in the finance industry, just to name a few—a focus on the short term is an omnipresent narrative thread. If managers and financiers had taken a more long-term view of the health of their own companies and the fortunes of their investors, we might not have seen the myriad other problems come to such a head. The addiction to leverage, derivatives, and greed that caused the market to become a casino would only have been possible in a business culture where short-term gains are prioritized over long-term costs. What might have been assumed to be costs that would be suffered some time in the distant future are being absorbed now. John Maynard Keynes was wrong on this point: in the long run, we are not all dead.
So despite some naysayers, the problem of short-termism is very real. Shareholders hold their stocks, on average, for less than a year, and even less for small companies. Institutional investors have been said to be particularly bad on this front, acting “more as traders, seeking short-term gain.” Managers admit that they make decisions that harm the company in the long-term in order to meet short-term earnings expectations. In 2006, both the Conference Board and the Business Roundtable, two of the nation’s most prominent business organizations, issued reports “decrying the short-term focus of the stock market and its dominance over American business behavior.” And, let’s remember, that was two years before the collapse.
The paper really needs to be read in full, especially for any individual trying to understand the pros and cons of a wide range of personal investment decisions. If only, to use Prof. Greenfield’s words, “This is because, at least according to many who have thought seriously about the topic, in the long run the interests of corporations conflate with those of society as a whole.”
I sense readers might be on the verge of giving up with this book because it ain’t nothing to do with dogs! There was a large part of me that agonised over what to include and what to leave out, not only with this chapter but with all the chapters in this section. Perhaps I might be forgiven for making another ‘sales pitch’ for this whole section! That is that if good, honest folk aren’t as fully aware of the major characteristics of this new century, as this author wasn’t before the research, we cannot develop the passion and zeal for saying and promoting, as far and wide as we can, that ‘enough is enough’!
One more quotation to round off the chapter.
The Guardian newspaper published an article in October 2013 written by Larry Elliott, the newspaper’s economics editor. It was entitled: Saving the planet from short-termism will take man-on-the-moon commitment.
We choose to go to the moon. So said John F Kennedy in September 1962 as he pledged a manned lunar landing by the end of the decade.
The US president knew that his country’s space programme would be expensive. He knew it would have its critics, but he took the long-term view. Warming to his theme in Houston that day, JFK went on: “We choose to go to the moon in this decade and do the other things, not because they are easy but because they are hard, because that goal will serve to organise and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others too.”
That was the world’s richest country at the apogee of its power in an age where both Democrats and Republicans were prepared to invest in the future. Kennedy’s predecessor, Dwight Eisenhower, took a plan for a system of interstate highways and made sure it happened.
Contrast that with today’s America, which looks less like the leader of the free world than a banana republic with a reserve currency. Planning for the long term now involves last-ditch deals on Capitol Hill to ensure the federal government can remain open until January and debts can be paid at least until February.
The US is not the only country with advanced short-termism. It merely provides the most egregious example of the disease. This is a world of fast food and short attention spans, of politicians so dominated by a 24/7 news agenda that they have lost the habit of planning for the long term.
That doesn’t get any easier to read and take in as one continues.
Politics, technology and human nature all militate in favour of kicking the can down the road. The most severe financial and economic crisis in more than half a century has further discouraged policymakers from raising their eyes from the present to the distant horizon.
Clearly, though, the world faces long-term challenges that will only become more acute through prevarication. These include coping with a bigger and ageing global population, ensuring growth is sustainable and equitable, providing resources to pay for modern transport and energy infrastructure, and reshaping international institutions so they represent the world as it is in the early 21st century rather than as it was in 1945.
Or possibly for society to really grasp? Larry Elliot’s closing words:
Another conclave of the global great and good is looking at what should be done in the much trickier area of climate change. The premise of the Global Commission on the Economy and Climate is that nothing will be done unless finance ministers are convinced of the need for action, especially given the damage caused by a deep recession and sluggish recovery.
Instead of preaching to the choir the plan is to show how to achieve key economic objectives – growth, investment, secure public finances, fairer distribution of income – while at the same time protecting the planet. The pitch to finance ministers will be that tackling climate change will require plenty of upfront investment that will boost growth rather than harm it.
Will this approach work? Well, maybe. But it will require business to see the long-term benefits of greening the economy as well as the short-term costs, because that would lead to the burst of technological innovation needed to accelerate progress. And it will require the same sort of commitment it took to win a world war or put a man on the moon.
Despite Mr. Elliot’s powerful plea, there might be a school of opinion, a growing school of opinion, that would argue fundamentally with the words of that plea. I’m referring to: “… the plan is to show how to achieve key economic objectives – growth, investment, secure public finances, fairer distribution of income – while at the same time protecting the planet.”
The next chapter on Materialism explains why “key economic objectives” may be the last type of measurement our world now demands.
2,217 words. Copyright © 2014 Paul Handover