Tyler Cowen suggests that we shouldn’t be freaked out by the emphasis on quarterly returns. Many public companies companies blame making quarterly numbers as a reason for short term planning, versus long term (one assumes) innovative strategies. The pieces suggests that that short sightedness may have a reason:
In information technology, the average life of a corporate asset is about six years, in health care it is about 11 years, and for consumer products it runs about 12 to 15. Very often it is hard for a company to plan its operations beyond those time periods, as the U.S. economy is no longer based on durable manufacturing machines. Production has shifted toward service sectors with relatively short asset lives, and that may call for a shorter-term orientation in response.
And, throw in all the “change or die”, digital transformation stuff and who knows what tomorrow will look like? As a counter, re-jiggering a company to be “digital” can take time. But, as Coleen suggests, investors don’t always seems to punish that (I’d add, if they have faith in management and the culture of the company):
Equity markets do not seem to neglect the longer run. Amazon has a high share price even though its earnings reports have usually failed to show a profit. Possibly the market judgment is wrong, but it’s hardly the case that investors are ignoring the long-run prospects of the company.
Further more, if I doesn’t work out:
If public shareholders are placing too much short-term pressure on their companies for a good quarterly earnings report, companies have the option of boosting their value by going private, as has been the trend. By 2012, the number of U.S. public corporations was less than half what it had been in 1997, in part because many companies went private. This is possible evidence that there have been problems with corporate short-termism, but on the other hand it shows that a market response is possible. Good governance is a scarce resource, and it may be that markets concentrate it in the places that need it most.