I found this article to be very interesting. I had never thought about how the business world analyzed everything in a short-term way or how this would affect the growth of different organizations. If an investment is to lose a large amount in a year most businesses will want to get out right away to try and minimize their loss. If they looked more long-term they might let this play out for a big return in the future. This article had several good points throughout it as well that taught me some new things in this area.
One thing that I learned from the article is that management will receive bonuses or be compensated for their short-term performance. This is helping promote the short-term investments that are all about just increasing the numbers for the next quarter. Yes this looks good on paper, but it leads to the organization under performing. It could make investments that would lead to bigger payouts, but they wouldn’t improve the numbers every quarter so they would not look as good to management. I understand that companies want to give their employees some incentive, but this shouldn’t be done at the sake of the company. There has to be other incentives that can be given to help boost long-term investment and growth.
Another thing that I learned is that investors and stockholders are a big problem in this area as well. They are always pushing for improved numbers so that they know their money is doing something for the company. They need to understand that improved numbers every quarter are not always going to happen and if they want to see higher returns they should look more on the long-term side of things. Losses are going to happen, but a lot of the times it will turn around with a big return as long as they invested smart.
This article also taught me that me that if a organization wants to make this transition it has to start at the top. The largest asset owner needs to make this known to the other investors. Hopefully after that it will create a snowball effect of support from top to bottom. This will allow the company to create a longer time horizon and invest for the future of the company. If there is not unity within the organization it can hurt them in the long-run. They may be torn between big decisions and might spend too much time arguing about whether or not to invest and miss the window needed.
What would prevent them?
There are several things that prevent these board members and executives from using a time horizon longer than three years. One of these things was mentioned at the beginning of the article. It talks about how in the economy there is a big pressure to maximize short-term results. This is because many of the performance ratios we use to help evaluate a company and make decisions about them are short-term ratios. The companies want to keep these ratios up so that they can continue to get new investors. This push also comes from stockholders. Many of them want to see a return on there money right away because they do not understand that if they live through some down years the return could be even greater. Businesses need to help get this information out to their investors so that they can hopefully convince them to let them use a time horizon of more than three years.
What do you think should be the objectives in the long term?
I think that the objectives in the long term will vary with different kinds of companies and their asset owners, but there are a couple I think are applicable to all of them. Of course, one of them would be to turn a profit. They are in business to make money so this has to be the top objective. Another objective for the company might be a certain time period to start making money off the project. If the time period for that is too long it might hinder their ability to begin or finish other projects.
Would you be willing to accept a 10-15% loss in the short term (1 year) for the opportunity to have much larger gain in the long term (3-5 years)?
I would gladly take a loss in the short term for a much larger payout in the end. It would make a lot more sense to help bring the money in for the company and the stockholders. The only thing that comes to mind is will the company be alright through the first year and are they able to take the loss. If the loss is going to take them under then it wouldn’t really matter about the bigger payout. That year might also hurt our ability to bring in more money from new stockholders. They may see that we had a loss that year and decide not to invest.
How do you go about doing this?
It is very difficult to make sure that both your internal investment professionals and the external fund managers are on the same page with long term investment horizon. It all starts when the asset owner or manager does the hiring. He or she needs to make sure that these people are smart and know how to operate in the long term. Like this article talks about many of them are prepared for the short term because that is how many businesses operate. Incentives are a way that can help assure this. Offering a higher performance fee for long-term investments will help this problem as well.
How does the small investor make an impact?
It can be very difficult for a small investor to make an impact in public companies. There are so many other investors with large amounts of stock that can carry a large majority with their vote. A small investor can do several different things to combat this. One of the things they can do is join one of the funds listed in the article. This would allow them to join a bigger capital group to help influence decisions. A small investor can also make a difference by talking to upper management if this is possible. The investor can bring it to their attention that the company may be under performing because it isn’t looking to invest long term. This may help influence them to talk it over with others and change the direction of the company.
How realistic do you think this is?
I think that this is a pretty realistic expectation. The thing is the asset managers or owners need to begin to look for people with that kind of expertise. The business world looks short term most of the time so many of the people in those positions are accustomed to this. Also they could begin to train the people they already have for the job. Doing workshops and training sessions for these employees would help improve their knowledge so that when the time comes they will be ready to make those decisions.
In today’s economy, many companies and investors look towards the short term gains/losses as whether or not the company is successful. This is hurting the growth and successful of many companies and investors. This has slowed the whole world’s economy growth, and can be changed by switching the focus on the long term growth of the company. However when a poll of board members asked about their views on the focus on the short vs long term goals, 79% felt they were pressured to have high short term performance in a period of less than two years (Barton, Dominic). Furthermore 73% of those polled said they should have a strategy focused on results in the long term of over three years (Barton, Dominic).
A board member or executive might feel pressured to focus on the short term gains of the company rather than long term success of the company to maintain their employment. If they do not show that they are making the company money they might be replaced. This might make them less inclined to look towards long term goals that will cost them in the short term.
I believe the objectives in the long term should be to grow the company at the highest sustainable rate while taking risks that in the short term might lower our profits, but will have high rewards in the long run. Furthermore be patient with the short term growth of the company, as well as support this in every level. I would be willing to accept a 10-15% loss in the short term if it was for long term rewards. An example of this might be buying a large piece of equipment, in order to gain a long term contract.
Another key objective would to implement a strategy that would account and reward superior managerial skill as well as, look for and negate over inflated income based on deferred assets based on long term debt.
You need to implement a strategy where both the internal investors and external fund managers are focused on the long term success of the company. This is implemented though first defining the long term objectives of the company and choose managers who will follow the strategy of the company, while not being afraid from leaving the ones who will not.
Having a board that is, “independent and professional, with relevant governance expertise and a demonstrated commitment to a long-term investment philosophy. Board members need to have the competencies and time to be knowledgeable and engaged. Is not practical in today’s society as there is no way to have an independent board when they are compensated by the company as, the better the more money the company makes, the more they can ask for (Barton, Dominic).
The small investor can make a difference by connecting with other small investors in order to collaborate their money in order to greater influence the running of the company. Small investors can