Let’s Bury Short-Termism to Avoid Another Crisis

Contributed by Bill George, professor of management practice at Harvard Business School

The Aspen Institute recently made the following announcement:

“Twenty-eight leaders representing business, investment, government, academia, and labor joined the Aspen Institute Business & Society Program’s Corporate Values Strategy Group (CVSG) to endorse a bold call to end the focus on value-destroying short-termism in our financial markets and create public policies that reward long-term value creation for investors and the public good.”

I am one of those twenty-eight leaders, and am proud to join the likes of Warren Buffett, Louis Gerstner, Barbara Hackman Franklin, and Richard Trumka as a signatory to the statement, “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.”

Short-termism (seeking quick profit at the expense of strategic growth and sustainable profits) is the bane of long-term economic prosperity. Short-termism derails growth strategies, is a detriment to long-term market health, and sows the seeds of greed-driven stock price manipulation. And in the current financial crisis, short-termism led many CEOs to irresponsible behavior in order to juice quarterly profits, ultimately putting the American economy into a tailspin.

It is imperative that we take shareholders who advocate short-termism to task, but we cannot force-feed just any solution. Rather, we need to incentivize the right one.

The proposal in this statement leverages responsible investment behavior by:
1) providing market-based incentives through restructured tax policy;
2) aligning investor interests with company interests; and
3) increasing the transparency of shareholder/investor influence.

Ultimately, these measures are aimed at encouraging shareholders and corporate leadership to “adopt long-term strategies for growth and sustainable earnings, and to rely on long-term, forward-looking metrics in the consideration of compensation and performance incentives.” I am sincerely confident we can achieve these goals.

Every signatory has their own reasons for joining the Aspen Institute in this project. I’ve included just a few of mine below in the hopes that it encourages other leaders to follow suit.

It is incumbent on America’s leaders to voluntarily commit to upholding and encouraging responsible business practices like these. We’ve been reminded all-too-recently of the business community’s potential ability to over-leverage itself in the interest of short-term profit, so it seems clear that the best means if ensuring responsible behavior is a mutually-enforced, preemptive commitment.

Putting these leverages into action is a key step towards making certain that we do not have to endure a similar financial collapse. The only way we can truly reform the financial system to the point where we will not risk collapse is if we incentivize responsible behavior on Wall Street. This plan does that explicitly. The market will always have ups and downs – such is its nature, and the nature of capitalism – but extreme highs and crashing lows reflect a maladjusted system.

This plan encourages simple, sound, and profitable business-logic. Strategic, long-term investments reap considerable benefits without the unreasonable risk accompanying short-term profit gimmicks that can lead to economic collapse.

You only need look at Berkshire Hathaway, Goldman Sachs, or IBM for top tier examples of success by long-term investment. And you only need look at GM, Lehman Brothers, and AIG for examples of those who subscribed to short-terminism.

You want smart investing? Make it long-term.

Bill George is professor of management practice at Harvard Business School and author of 7 Lessons for Leading in Crisis, True North, and Authentic Leadership. The former chair and CEO of Medtronic, he currently serves on the boards of ExxonMobil and Goldman Sachs and previously, Novartis and Target. Read more at www.BillGeorge.org, or follow him on Twitter @Bill_George.