Corporate Short-Term Thinking and the Winner Takes All Market


a peer-reviewed articleEduard Gracia is a senior manager with Deloitte MCS, Strategy & Operations in London, England.



Corporate short-term thinking is not a new phenomenon related to the most recent corporate scandals. It has been conspicuously present for at least the last 30 years. This paper proposes that it should be interpreted as a side effect of our increasingly competitive economic system. A competitive market tends to create a wide difference between the payoffs for "winners" and "losers": what we call a "winner-take-all" system. Thus, with such high stakes depending on every next move, there is a strong incentive for companies and individuals to focus on just winning the next round, i.e., to think short-term regardless of the impact on the business' long-term viability.

An Old Debate

In 1981, when the world was at the deep end of the so-called Second Oil Crisis, Marvin Harris, an American anthropologist, published a short essay entitled "America Now: the Anthropology of a Changing Culture". In it he analyzed the underlying economic phenomena that had ultimately generated a wide cultural change, and he found out that the problem could to a large extent be traced back to the general lack of reliability of goods and services produced in America t that time, and that this, in turn, was attributable to the short-term-oriented management style that had increasingly dominated corporate America since the end of World War II:

“The observers [agree] that there is something in the way today’s executives relate to their companies that makes them different from the previous generation of corporate leaders. De Lorean, for example, depicts them as ‘short-term professional executives’ that remain in a company less than ten years and that are driven by the need to produce immediate profits during their short tenure. Due to the frequent change from one company to another, their economic position does no longer depend mainly on owning assets in the company they work for, and therefore do not need to worry about what will happen if, say, the reputation of their firm regarding quality falls to pieces soon after they left. Richard Barnet and Ronald Müller forecasted in their book "Global Reach" that the new breed of ‘monetary executives and marketing experts’ would have ‘little personal interest or direct pride in their products’ and it would be unlikely for them to show a ‘passion for quality or technical excellence’."

The quote from Barnet and Müller goes back to 1974, over a quarter of a century before Enron, Worldcom, and the stock-options scandals, [1] but it seems clear that, while the generation of executives of the sixties and seventies may have been very different from the preceding one, it certainly was more or less the same as the ones that have followed. Not even the executive pay scandals are new: in 1981, for example, while the ink was still drying on Harris’ book, scandal hit the American press as Roger Smith, then CEO of General Motors, awarded himself a $1.5 million bonus in the midst of the severest recession the US automobile industry had ever experienced (Fukuyama, 1996).

In the wake of the most recent corporate scandals it has once again become fashionable to criticize this “myopia of bad behavior” (as Jeffrey Seglin, 2003, called it in a recent article), often in fairly apocalyptic terms and in a tone that seems to imply that “something” should be done about it. However, without an understanding of the underlying causes of this phenomenon, the recent outcry is not likely to be any more effective than its predecessors  apart from, perhaps, encouraging the deployment of government regulatory measures that, as public intervention usually does, are more likely to impair the efficiency of the system as a whole rather than solving any real problem.

Therefore, the objective of this paper is to put forward a potential explanation of this phenomenon that is consistent with its remarkable resilience over time as well as its presence in economic systems that otherwise are quite healthy. Specifically, the phenomenon can be interpreted as a side effect of free market competition and, therefore, not only are there no “magic bullets” available, but solutions based on radical forms of intervention are likely to do more harm than good. Instead, just as in the case of a chronic illness, it will be suggested that it is better not to try to fix it once and for all, but rather to consistently monitor its evolution and fine-tune the balance of long vs. short-term incentives within the organization whenever they deviate too much from the desired “balance",  which, incidentally, may also change over time. Therefore, this paper will conclude by presenting a small set of intuitive metrics to identify whether the behavior of a given organization is so short-term focused that it could be jeopardizing its own future viability.

The Nature Of The Problem 

Why should focus on short-term goals be regarded as a problem at all? We can interpret corporate short-term thinking as the equivalent of evaluating investment alternatives under a high discount rate. Imagine two alternative investment decisions: one (let’s call it A) requiring an initial payment of $100 in period 1 and promising an incremental cash flow of $1The Nature Of The Problem0 for every subsequent period, and another one (call it B) offering an initial positive cash flow of $100 in period 1, but which generates a negative cash flow of $10 for every period afterwards. Other things being equal, the higher the discount rate applied to evaluate these two investment opportunities (i.e., the more short-term-focused the company’s decision process), the more inclined will the organization be to choose B rather than A, which, if this pattern of decision is consistent, may lead to sacrifice the long-term profitability prospects for short-term cash flow. Thus, if the risk-adjusted market discount rate (i.e., the rate of return demanded by investors for projects under the same risk) is taken as the “correct” value of time, there is a management short-term-thinking “problem” if there is evidence that corporate leadership make their decisions based on a discount rate higher than this market-defined one.

Is there any hard evidence that this is happening in the real world? Although it is very difficult to quantify the “true” discount rate implicit in corporate decision-making, available evidence suggests so, at least for the USA. For example, Poterba & Summers (1995), working on a survey of CEOs at Fortune 1,000 firms, find that “most U.S. firms use hurdle rates that are higher than standard cost-of-capital analysis would suggest”, and, more specifically, that “the average discount rate applied to constant-dollar cash flows was 12.2 percent, distinctly higher than equity holders’ average rates of return and much higher than the return on debt during the past half-century”. In other words, they could be choosing an investment like B in the above example above when choosing investment A would have been preferable from their shareholders’ viewpoint.

That systematic short-term thinking can damage the long-term prospects of a company is not only a matter of common sense, but it is also an observation consistently supported by empirical evidence. Over ten years ago, for example, Shapiro & Slywotzky (1993) had already stated that in  “relying on short-term thinking, many companies base their marketing budgets on annual sales forecasts and then demand immediate results based on dollars spent. These companies are confusing cause and effect. They don't realize that developing a ‘quality’ customer base--loyal customers who yield high profits--can take many years. And quality is what matters for long-term success.” Along the same lines, Collins & Porras (1997), in their well-known book "Built to Last," consistently find that companies that stay as market leaders for very long periods of time generally display a more long-term-focused business thinking and ethos than their direct competitors.

Furthermore, although the phenomenon of short-term-thinking can be traced back in corporate America at least to the 1960’s, as we have seen, there is also strong evidence that the average tenure of chief executives, and in particular the time CEOs have to deliver results after moving into a new position, has consistently declined over time. in other words, the time horizon these executives have to fit their decisions within has consistently shortened. For example, Khurana (2002), after examining 1,300 occasions between 1980 and 1996 when chief executives of Fortune 500 firms left their jobs, finds that, for a similar performance, a chief executive appointed after 1985 was three times as likely to be fired as one appointed before that date. That this tendency has become more pronounced after 1996 is confirmed in a recent study by Lucier, Schuyt & Spiegel (2003) based on a sample of 2,500 big publicly-traded companies worldwide.

According to the evidence presented in this paper, even if we reject the executive turnover of 2001 and 2002 as not indicative of a long term trend resulting from the several sharp stock market declines that took place after November 2000, and if we also leave aside both “regular” (i.e., succession due to retirement or other “natural” causes) and “merger-driven” turnover as not indicative of how much time an executive really has to “make a difference”,  the global incidence of performance-related CEO turnover in large firms went from 1.0% in 1995 to 3.2% in 2000 and, in the particular case of the USA, from 1.3% to 5.2% during the same years. (European companies, although somewhat less “trigger-happy”, display a similar evolution over the same period, going from 1.0% in 1995 to 2.7% in 2000.) The same study also points out that the average tenure of CEOs that were replaced for performance-driven reasons went from 7 years in 1995 to 4.8 in 2000 and, in the case of the US, from 8.9 years in 1995 to 4.9 in 2000. In sum, these data suggest that the time horizon within which senior executives need to demonstrate their ability to deliver results has significantly shortened over time.

What is probably the most remarkable aspect of the recent corporate scandals is that they have in many cases hit precisely those companies that had previously been praised as most entrepreneurial and innovative. Enron, for example, achieved Fortune magazine's sobriquet of “the most innovative firm in America” for six consecutive years, and it was widely regarded as an example of corporate excellence by scholars and consultants alike until its spectacular failure in late 2001 (Bodily & Brunner, 2002). And MCI, the US telephone long distance provider that constituted the largest part of Worldcom, had achieved its success since the mid-60’s by using its superior dynamism and creativity to beat telecom giant AT&T on its own playing field. In other words, we are not talking about’s with dubious business histories here, but about companies whose outperforming of their rivals had consistently been attributed by analysts, consultants, and academia alike to their entrepreneurial structure, their openness to innovation, and their focus on measurable results (e.g., Enron’s “laser-focus” on profit per share). Their demise, thus, should equally raise the question of whether it was these same factors that ultimately caused the disaster. As the journalist Malcolm Gladwell put it in The New Yorker magazine: “what if Enron failed not in spite of its talent mindset but because of it?” (Birkinshaw, 2003).

Now, how could this be? We are all familiar both with the classical economic case for free market competition and with the strong case business literature has been making for decades in favor of management by measurable objectives. Do these observations contradict this long-accepted analysis? As will be argued below, a bias towards short-term results can be regarded, within the same analytical framework, as just an undesirable (and potentially dangerous) side effect of the increased efficiency of a competitive market system. [2]

The Winner Take-All GameThe Winner-Take-All Game

A simple mental experiment should help to illustrate how this can happen. Imagine a country with ten cities, in each one of which lives a single doctor, and let’s assume there are strong limitations for people to go visit physicians in cities other than their own, be it due to a deficient transport system, to a legal system that requires them to depend upon a local doctor, or to any other reason. The income of each one of the physicians, assuming the size and morbidity of the different cities to be roughly the same, will thus also tend to be more or less the same. The physicians, under these conditions, will not have many incentives to invest in advertising themselves, as there is no pressure for competition, and the control by each one of them of his/her own city market will have monopolistic characteristics, with the corresponding impact on price and quality. On the other hand, the planning investment horizon of each one of the physicians will tend to be relatively long, as the expectation is that each city market will belong to its local doctor for a long time, and perhaps even pass to his or her descendants.

Now suppose that the barriers to free competition disappear: communications improve across the cities, and there are no legal restrictions to prevent people from freely choosing any doctor. What happens now? To begin with, of course, people will tend to go to the doctor with the best reputation. Thus, other things being equal, the income of the best physicians will rise, and that of the worst will decline. At the extreme (e.g., if the best physician can really deal with all the patients and, thus, all the other doctors have no business), this is just a winner-take-all game. There will be competitive pressure both on prices and quality and on the proportion of their income the physicians spend on advertising themselves. There will also be a strong tendency for success (or failure) to retro-feed itself: the most successful doctors will make more money and, therefore, be able to afford both better equipment and more expensive advertising. This means that winning in the next few rounds of the game has a potentially very high relevance, as it determines to a large extent the conditions under which the player is going to have to compete afterwards. Yet success will always have the potential of being short-lived because tomorrow an unfortunate mistake in a difficult surgery procedure or the appearance of a new, better advertised or genuinely more gifted competitor can trigger the vicious cycle of failure for the physician that today is at the top of the world. This provides an incentive for market leaders to stay “on their toes” for sure, but it also discounts any long-term investment at a heavy risk premium, especially if it reduces the chances of immediate success. At this point, the reader may have spotted a seeming contradiction: if the physician “on top” keeps focusing on his short-term marketability and downplaying longer-term investments (such as his own retraining), isn’t he implicitly digging his own grave in the long run? The answer is yes, of course, as this is precisely the nature of the dilemma.

This is what we could call “Hollywood-style economics”, as it is indeed how the Hollywood star system has worked almost from the beginning. The Hollywood cinema industry is a very competitive industry with global reach. Every weekend, people in the whole world are free to chose what movie they want to watch, and they do so based on a few parameters such as the name of the featured actors or a trailer they saw last week. The value of the theatre ticket of each one is minimal, but there is almost no limit to the number of people who can go to a given movie, and, therefore,  the potential revenue from a film can swing from zero (no one was interested) to many millions (Everyone went to watch it, and some even went twice.). In other words: as in the case of the doctors after the barriers between the cities was removed, the difference between the physician (or, in this case, the actor) on top and the one at the bottom of the ranking is potentially huge. Under these conditions, of course, the stakes are very high, and the competition must be cut-throat. Therefore, reputation is everything, and the salaries of the actors at the top of the system are an almost obscene multiple of those of many others who are only slightly less gifted, or simply have been a bit less lucky or a bit less ruthless.

Our modern economy, increasingly global, competitive and meritocratic as it is, just cannot be excluded from this same rule: as competition grows on a global scale, the pressure for performance will increase, which is a stimulating factor but, at the same time, the planning horizon of corporations and even individuals will tend to become somewhat shorter simply because none of them can count on retaining his/her position in the marketplace in the long run. This, of course, generates interesting and seemingly paradoxical effects. For example, as long as the top leadership of Marks & Spencer in the UK was securely in the hands of a member of the founding family (as it was always the case from the company’s foundation in 1894 until 1984), the CEO never needed to justify a long-term-oriented policy of sustained product quality and client service, even when facing temporary losses, simply because he/she did not face the risk of dismissal. In fact, the problems that ended up in the spectacular nosedive of this firm in 1999 can to a large extent be attributed to a series of policies increasingly aimed at improving measurable results in the short term that M&S applied throughout the 90s (Bevan, 2001). This is by no means an exceptional situation. In a recent paper, Anderson & Reeb (2003), working on US data from S&P 500 companies over the period 1992 to 1999, found statistically robust evidence that “family firms perform better than non-family firms” and that, even within the set of family-controlled firms, “when family members serve as CEO, performance is better than with outside CEOs”. They link these findings directly to those of James (1999) in the sense that family firms can attain greater investment efficiency due to their longer investment horizons. [3]

Conversely, for a hired CEO who is exposed to being fired if short-term results are below the board’s expectations, reputation represents a large portion of his/her market value, and reputation is built upon sustained, demonstrated success. The stakes are high and, thus, it is not at all surprising that, as the above-mentioned Poterba & Summers (1995) research found, they discount their companies’ investments at a rate higher than that applied by the shareholders they serve. Interestingly, the same paper also found that “at the time of the survey, the fall of 1990, U.S. CEOs believed that their firms had systematically shorter time horizons than their major competitors in Europe and (especially) Asia”, which is consistent with the general observation that the US market is still freer and more internally competitive than most of the European and Asian ones. This is also consistent with the findings of Lucier, Schuyt & Spiegel (2003), who are also quoted above, which suggest that CEO performance-related turnover rates are generally higher in the US than in either Europe and Asia, although the long-term tendency is for the latter to gradually approach the US rates over time.

The pressure, of course, rarely stays at CEO level, as it tends to spread top down throughout the whole organization culture. For example, while one should always take comments on a failed business with more than a grain of salt (It is just too easy to pontificate on what went wrong in a business after it has failed.), the analysis of Enron’s case suggest that it was to a large extent their aggressive culture of internal competition as represented by the annual performance review. Informally known as “rank and yank”, whose focus on measurable results within the period being appraised meant that, in the words of a former employee, “people went from being geniuses to idiots overnight” and which typically resulted in the bottom 10-20% performers being regularly fired. It meant, too, unyielding focus on results. According to a former employee, “they were so goal-oriented toward immediate gratification that they lost sight of the future,”  and this is what ultimately led them to catastrophe (Bodily & Brunner, 2002).

How Does This Impact The Corporate Workplace?How Does This Impact The Corporate Workplace?

Remember the Prisoner’s Dilemma? The classical exposition of this famous intellectual game is just like the plot of an old cops’ movie. (For a layman’s exposition see for example Ridley, 1998.) Two accomplices in crime are put in jail and interrogated by the police in separate cells. They know that, if no one confesses to the crime, they will both go free because the police has no other evidence against them; whereas if they both accuse each other they will both be put in jail for, say, five years. But if one of them accuses the other and the other does not accuse him, then the accuser will go free, whereas the other one will go to prison for, say, ten years for both the crime and non-cooperation. Once isolated, then, and if the game is only going to be played once, the rational decision for each one is of course to betray the other because, regardless of whether the other criminal has betrayed him back or not, the outcome in either case is equal or better if he betrays. In other words, the rational decision is not to cooperate, even though the outcome of both being rational is to end up worse off than if they had both cooperated.

The rational outcome of the game changes radically if, instead of being played only once, it is played many consecutive times, because then each player has an incentive to cooperate based on the fact that, otherwise, the other player will “take revenge” the next time and refuse to cooperate, thus pushing the whole community into a worse scenario. In other words, what determines whether cooperation is rational or not is the time horizon of each decision maker: in an oft-repeated game, long-term thinking will encourage cooperation, short-term thinking will not.  In a game with very high stakes on the first round (say, if the player who is betrayed but does not betray in return is to be sent to the electric chair), the time horizon will necessarily be very short, and in a free-market economy where competition is ruthless and the rule is that the winner takes all, the players’ thinking process is thus bound to be focused on the very short term.

This logical deduction is supported by anthropological observation. For example, in his analysis of the dynamics of what he calls “high-trust” (e.g., Germany or Japan) vs. “low-trust” (e.g., France, Italy, China or Korea) societies, Fukuyama (1996) comes to the conclusion that the US has gone through a gradual process of transformation from “high-trust” to “low-trust” social dynamics more or less parallel to the spectacular development of its market economy in the last century. This is not a truly novel observation, though, as fifteen years earlier, Harris (1981) had already reached essentially the same conclusion. All this suggests that we should not expect this tendency to revert in the long run, or at least not as long as the gradual removal of both legal and technological barriers to a free global market continues. In a way, we could say this is one of the ways we pay for the benefits of market liberalization.

Furthermore, it could even be argued that the widespread sense of discomfort that some corporate management policies have caused have not so much been a consequence of their lack of long-term focus as of their coming up at a time of transition in which not all the players were yet aware of the new rules until it was too late. It is again like in the prisoner’s dilemma: a player that cheats and is cheated in return has no reason to complain, but one that cooperates only to find out the other player cheated on him does. For example, when the large American car makers consistently degraded the quality of their products throughout the 1960’s and 70’s in order to increase their quarterly profits (as described in Harris, 1981), they took advantage of the confidence their customers had back then in the quality of these products, a confidence that took them a few years to lose, after which, of course, customers started to consider alternatives (e.g., Japanese cars). Similarly, during the “downsizing” waves in corporate America during the 80’s and 90’s, many people were caught off-guard because they had expectations based on a “paternalistic” company model that was then in the process of disappearing. [4] At the end of each one of these processes, of course, the result has been that the side that felt “cheated” has grown smarter and, after an uneasy period of stabilization, the system has regained balance, only under different rules. Reading Richard Sennett’s portrait of the American workplace in the 1990’s, The Corrosion of Character, one quickly gets the impression that the lack of sense of organization loyalty, direct pride in the company product and expectation of life employment that, as we saw above, had already been pointed out in managers and executives of large companies of the 70’s has, twenty years thereafter, spread down the social pecking order to the level of the workers on a small bakery shop floor. [5] Clearly, the world has changed, whether we like it or not.

It would just be too easy to fall in the temptation of nostalgia. When in the late 1940’s and early 50’s the loyal, disciplined, “other-directed” organization man committed to a lifetime career within the corporation was identified in America as a new human subspecies, he was not precisely hailed with enthusiasm, but rather seen as a corporate slave with golden handcuffs, always obsessed about the image he was projecting on to others and overall possessing a weaker sense of self than the “inner-directed” captains of industry that preceded him. This is a criticism, incidentally, that we would probably subscribe even more today. [6] And yet, traveling still a bit further back in time, those “inner-directed”, ruthless and individualistic industry captains that dominated the pre-war US business landscape before the arrival of the “organization man” do not appear to us (nor did they appear to many of their contemporaries) as a type any more desirable than the opportunistic, manipulative, perpetually-smiling breed of our times. Change is always a frightful experience, but there is no reason to think this last turn of the wheel is any more catastrophic than those that preceded it.

Elements For A DiagnosticElements For A Diagnostic

So how can an investor or a corporate leader know whether a company is destroying its own future prospects? The immediate first idea: to check the official corporate discount rates corporations apply to their investments, at least for those cases where this information is publicly disclosed, is, unfortunately, not very useful in practice, as these rates are generally not as a critical factor in the real decision making but just as a technique to sense-check that a decision made on a more “gut-feel” basis makes some theoretical economic sense. This is why Poterba & Summers (1995) had, instead,  to resort to a poll on the subjective opinions of a sample of CEOs, but this type of result only becomes statistically significant over very large numbers of observations and, therefore, is unlikely to help an external observer to reliably assess what is really happening inside a given company. And while one could always use a standard pricing model to estimate the cost of capital that should theoretically be used to discount the company’s investments, one of the lessons of Poterba & Summers (1995) is precisely that this does not tell us much about the implicit discount rate internal decisions are really subject to.

A similar problem would appear if we tried to use average management tenure time or performance-based management turnover rates as an indicator of the management decisions’ time horizon. True, we have already seen, when discussing the evidence in Khurana (1999) and Lucier, Schuyt & Spiegel (2003), how executive average tenure and performance-based turnover rates can be linked to the average length of the corporate decision time horizon, and we have also discussed how aggressive management performance evaluation systems can intuitively be linked to the failure of companies like Enron (Bodily & Brunner, 2002), but  this information is usually not publicly disclosed, except for the very special case of top executive positions, and in these cases the numbers involved in the case of any given company (as opposed to the industry averages utilized in the papers cited above) are usually too low to provide statistically significant information.

However, in the absence of this direct measurement, we can still try to use a battery of indicators such that, while none of them in isolation would be enough to provide any more than circumstantial evidence on the problem, their combination may still be able to highlight the presence of an issue of excessive short-term focus. Among the quantifiable metrics that would usually be available to an external analyst, I have selected the three that appear below, whose link to short-term thinking issues is best supported by both academic literature and personal observation:


High Financial Leverage: This is perhaps the variable whose link to corporate short-term thinking is most reliably supported by empirical evidence. When things do not go well in a business, one of the most conspicuous indicators of it is, of course, a decline in the free cash flow it generates. Now, a fall in the free cash flow is not necessarily an indicator of short-term thinking, of course. In many cases it may in fact be an indicator of the opposite (e.g., it could be due to increased investment in R&D). Yet when the “hole” is consistently being financed through debt, and in particular through short-term liabilities, this may be a symptom that the company’s leaders are using financial leverage as a “quick fix” of a problem whose solution is likely to require a longer-term approach. In the words of Li & Simerly (2000), “the use of leverage either to discipline managers or to achieve economic gain is the ‘easy way out’, and, in many instances, can lead to the demise of the organization.” Similar studies performed on different data samples (e.g., Peyer & Shivdasani, 2001) all but confirm this conclusion. Ultimately, aggressive financial leverage entails, other things being equal, an increase in the risk associated to the corporate equity and therefore, at least in high-variability industries, a degree of financial leverage above the industry average that may well indicate an underlying problem for which management is trying to find a quick fix by raising the bets. This is again consistent with the findings at Li & Simerly (2000), according to which, at least in “high dynamism” (i.e., high variability) industries, aggressive levels of financial leverage are statistically correlated to lower performance over the long run. In addition, financial leverage can start a vicious cycle, as the pressure to meet the debt payment terms will increase the short-term pressure on the organization, which may result in further deterioration of its long-term prospects, that leads to further need for credit, etc, Of course, a rapid increase in the financial leverage of a company can also be due to management's need to finance growth, and, therefore, be an indicator that good times are ahead. Nevertheless, if high financial leverage coincides with other indicators of short-term thinking (like the ones listed below), it may constitute a warning signal.

Rapid Profitability Growth: This should raise a warning signal when the profitability growth rate is significantly higher than that of comparable companies in the same industry and, especially (but not solely), when it does not result from a corresponding increase in sales. The rationale for this is that, if at a certain point in time the corporate decisions become more short-term focused,  profitability should be expected to go up, at least for a while, because costs whose benefit is only observable in the long run (say, research, customer service or simply the quality of the input materials) can be reduced. In most cases this type of action will translate into a higher net profit per unit of sales (although not in all cases: for example, financial institutions that increase their profitability per share by moving into riskier forms of investment may or may not experience a higher profit per currency unit lent). This would in some cases explain why some of the most spectacular corporate failures in recent times have been preceded by almost equally remarkable increases in profitability. For example, in the case of Marks & Spencer’s  (mentioned above) profit-on-sales ratio was over 14% in both 1997 and 1998 (i.e., right before the sudden nosedive in 1999), the highest recorded since the company’s flotation in 1927 and the highest of any large retailer at the time except WalMart (Bevan, 2001). Similarly, IBM’s all-time record profit in 1990 was followed by record losses of almost US$ 16 billion in 1993. Of course this rule-of-thumb works best for business whose profits are relatively stable than for those that, like oil & gas, are inherently exposed to a large profit variability from one year to the next without this necessarily implying anything abnormal. Even in the case of Enron, however, it should be noted that the total profit in both 1998 and 1999 was the highest in the whole history of the firm (Bodily & Brunner, 2002). While there is, of course, no denying that rapid profit growth can also take place due to a smart business strategy (say, the launch of a very successful product line), there are enough recorded instances of abnormally high profits shortly followed by corporate disaster to justify including this as an indicator of a potential underlying issue.

Low Indices of Customer and/or Employee Satisfaction: Perhaps the most intuitively self-evident measure of all, this one tries to identify the sources of trouble early on. If cost cuts have been made at the expense of product quality or customer service, or have had an impact in the level of staff motivation, measures like these may be able to raise an alert signal before it is too late. A decline in both customer and employee satisfaction traceable on anecdotal evidence at least as far back as 1995 or 1996 was, for example, one of the most conspicuous early warning signals in the case of Marks & Spencer (Bevan, 2001). Interestingly, although empirical studies tend to confirm the positive correlation between customer satisfaction and business results, the relationship has been found not to be very strong. (See for example Boselie, Hesselink & van der Wiele, 2001.)  This should not be a surprise anyway, if we remember that the intuitive relationship is between customer satisfaction and long-term performance, whilst in the short run the relationship can remain negative for a while (and this can still mean a number of years, especially in certain industries). A similar analysis can be applied to employee satisfaction. Thus, although customer and/or employee satisfaction may be driven by many factors unrelated to short-term thinking by management, when it takes place at the same time as one or both of the more “quantitative” metrics above, it may be a strong indication that short-term management focus may be at fault. This metric being a relatively “soft” measure, however, the information required may not always be readily available to outsiders in the same way “hard” stock market valuations and financial accounting data usually are for publicly traded firms, and they may, therefore, have to rely on incomplete and to some extent subjective data to assess these levels of satisfaction. Moreover, the evidence available does not suggest that the implication can also be made in the other direction (i.e., if everyone is happy, then management must be thinking long-term) because the levels of both customer and employee satisfaction in some of the companies responsible for the big cases of corporate failure in the last few years (e.g., Enron or Adelphia) were in fact remarkably high by their industry standards (see Bodily & Brunner, 2002).


Once again, none of these indicators constitutes absolute evidence of corporate short-term thinking all by itself, and examples of both healthy companies where one or more of these indicators were present and unhealthy ones where they were not can always be found, but when several of them appear together in a corporation, past experiences suggest we may be facing a problem of corporate myopia.

At the end of the day, the success and even the survival of a corporation will depend on its ability to strike the right balance between short and long-term goals, and there is no scientific method to determine where this “right” balance would be at every point in time. On the other hand, market pressure may now indeed be increasing the weight of the short-term component in this magic mix, but the balance still needs to be there. A corporation that forgets this is like a marathon runner who, trying to impress the public, started sprinting at full speed from the very beginning of the race: he would most certainly rush well ahead of all the other runners for the first few hundred meters, but then he would never make it to the end of the race… just like Enron.


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[1]  In fact we could go back even further.  For example, E. E. Jenning’s classical analysis of the same phenomenon, "Routes to the Executive Suite," was first published in 1971.
[2] Before proceeding to develop the main ideas in this paper, it may make sense to pass on a few comments about some of the most common explanations that have been put forth for the same phenomenon. In an admittedly gross oversimplification, we could say the most usual explanations provided so far would fall in the following four main categories:

a) “Agency costs”, i.e., the risk that professional corporate managers act in their own self-interest instead of that of the shareholders. The classical version of this theory (Berle & Means, 1932) was proposed shortly after the Wall Street Crash in 1929, i.e., at a time when, just like now, there were serious, widespread concerns about the trustworthiness of American corporate leadership. This hypothesis is solid and, to a large extent, consistent with the one proposed in this paper. However, it does not explain why individuals making decisions on their own behalf often display short-term behavior when they act in a competitive economic system, and, in particular, why shareholders would so many times fail to impose tighter controls on the professional managers in whose hands they entrust their money instead of rewarding them for following policies with a clear short-term bias. Furthermore, it was precisely agency costs theory that provided the strongest theoretical for the widespread use of stock options and market-value-based compensation systems in the 80’s and 90’s. (“If their compensation is tied to the share value, the corporate leaders will act in the shareholders’ best interest.”) The fact that issues related to short-term thinking have by no means become less common as a consequence of these policies suggests that agency theory alone cannot explain the phenomenon.
b) The increasingly oligopolistic nature of the modern US economy gives the large corporations a high degree of market control. Popular among the left-leaning intellectuals of the 60’s and 70’s, this hypothesis (which, incidentally, was the main one put forward in Harris’ 1981 book) does not explain why the economies of Germany and Japan, where the degree of corporate concentration (and collusion, most notably between financial institutions and industrial conglomerates) was and still is significantly higher than in the USA, seemed to think longer-term than their US counterparts at least until the mid-80’s. Fukuyama (1996), for example, classifies these two countries as “high-trust societies”, whereas France, Italy, China, and modern USA are in his nomenclature “low-trust societies”. Fukuyama, in fact, quotes data according to which in 1985 the 10 largest companies in the USA represented 13.1% of the total US employment, whereas the equivalent ratio for the 10 largest West German companies was 20.1%. (The same measurement for the 20 largest companies in each country yields the same conclusion, with an 18.6% for the USA vs. a 26% for West Germany.)
c) The increasing predominance of a protective welfare state encourages economic agents to leave long-term thinking to the government (in a form of “moral hazard”). Strong in neo-conservative circles of the Reagan era and afterwards was a philosophy whose roots can reasonably be traced back at least to Alexis de Tocqueville work in the 1840’s. The objection to this is almost the same as above: it does not explain why corporate short-term thinking would be less conspicuous, say, in Germany and Japan, because the German and Japanese governments have traditionally been much more inclined to apply protectionist policies and rescue failing companies from the brink of bankruptcy on grounds of “national interest” than has the US government.
d) The growing distrust generated by the increasing litigiousness of the American society; the prevalence of hedonistic/materialistic/selfish attitudes; the growth of technologies like television or the internet that encourage people’s isolation from other human beings; the perverse impact of media glorification of celebrity CEO’s and quick-hit millionaires on the social ethical frame; etc. Explanations of this sort generally feel quite “ad hoc” in the sense that are only sustainable as viable explanations for this phenomenon in a specific country, social environment, or historical period, but fail to explain it in a wider context.

[3] This, by the way, also coincides with my personal experience. For example, early in my career I held a position in the internal audit department of a leading industrial group in Spain. This firm, which was a clear case of founding-family control (The top position was held by the eldest son of the founder.) was in fact highly profitable despite its somewhat non-meritocratic ways; indeed, one had the impression that executive positions were primarily assigned based on criteria of “loyalty” to the firm, rather than of professional competence. Of course one could also find many examples of the opposite: founding-family-controlled firms that consistently seem to barely be able to stay afloat are by no means a rarity, but it is still worth pointing out that they do not necessarily constitute the rule.
[4] I am not implying here that the downsizing of the large American corporations was “wrong” per se. In fact, it was a key element to shake up the prodigiously inefficient bureaucratic organizations they had grown into throughout the good years since the end of World War II and make them able to compete against producers from Germany or the Far East. However, for the legions of organization men that had given their best working years to the corporation, instead of keeping their skills tuned in with the wider market, because they expected to be rewarded for their loyalty  this felt like a betrayal regardless of its underlying reasons, and it contributed to the deterioration of the sense of corporate loyalty in the USA afterwards.
[5] Indeed, one of the most memorable vignettes in Sennett’s book is the comparison of the way a Boston bakery is operated now as opposed to twenty years ago. In the old bakery, bread was made by experienced workers of Italian descent whose long-term prospect was to stay in the same job for life. Conversely, in the modern bakery, highly mechanized and requiring only relatively non-qualified labor, none of the workers, with the sole possible exception of the manager, expresses an interest in staying in that job for any extended period of time, let alone in improving his skills for it.
[6] For a contemporary analysis of the transition from the individualistic management style commonly associated to American business until the 30’s to the more group-oriented, “bureaucratic” model of the 50’s see for example Riesman (1950) or Whyte (1956). The adjectives “inner-directed” and “other-directed” are of course a direct borrowing from Riesman (1950).


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