Short-Termism: The Fast Route to Unethical Business Behaviour

Amazon’s founder Jeff Bezos, is helping to fund a 200 foot tall clock designed to last millennia. 

millenia clockHe calls it “The 10,000 Year Clock” being built deep inside a Nevada mountain.

We humans have become so technologically sophisticated that in certain ways we’re dangerous to ourselves. It’s going to be increasingly important over time for humanity to take a longer-term view of its future.”
Jeff Bezos, Wall Street Journal June 2012 feature,

Jeff Bezos and the 10,000 year clock
What happens when a company normally focused on the long-term starts paying attention to the very short-term?

That’s a current headache at Rolls Royce, where a new activist shareholder is complaining about the company’s effectiveness and demanding change.

For example, this minority shareholder wants the company to dump a large chunk of its profitable business for what comes down to purely financial and predatory reasons.

Something similar happened at DuPont recently. Another activist shareholder led to the closure of its central research labs and splitting up the company.

Yet around a third of the company’s products stemmed from this productive and legendary R&D operation. For example, it produced Kevlar and nylon.

“But you can get a short-term pop from breaking up assets that have long-term value. If large enterprises operate with a short-term trader’s mentality, then we won’t have any healthy organizations.”
Jeffrey A. Sonnenfeld, senior associate dean for leadership programs at Yale School of Management.

Other critics also declare DuPont a well-run company that “never should have come under attack”. But in the end, the CEO of seven years, and ranked in 2015 by Forbes as the world’s 26th Most Powerful Woman, decided to quit. Short-termism triumphed.

So should Rolls Royce’s new CEO pay any attention to the latest outside pressure to go for short term results?

Financier Larry Fink of BlackwaterNot according to Larry Fink, head of the world’s biggest money management firm Blackrock. He’s a leading player in global finance and earlier in 2015 wrote to major CEOs asking them to ignore their activist shareholders.

Instead, Fink urged his fellow CEOs to focus on the long-term health of their companies.

“We want companies to be more transparent about their long term strategies so that we can measure them over a long term cycle.”

Definition of short termismYet there are many countervailing forces pushing firms to deliver purely short-term outcomes.

These include new levels of shareholder activism in the last five years, new technologies, reduced trading times and transaction costs, increased market volatility, and media coverage.

Even a country’s tax regime can trigger adverse short-term thinking–whether to stay or go, whether to seek alliances elsewhere that produce a favourable tax outcome and so on.

Pfizer is a good example of this occurring as it attempts to win a lower tax regime by a merger with an Irish Company. It may be legal, but is it ethical?

More to the point, will it really benefit the company in the long term—US regulators are bent on killing off such moves, sooner rather than later.

What shareholders actually want

It depends of course, which shareholders we’re talking about. Hedge funds for instance, live or die by short-term thinking. To them a five year time horizon is like “forever.”

But ignoring such shareholders can be a risky strategy. Many CEO’s have trouble taking well-meaning advice from the likes of Larry Fink.

Unilever’s CEO though, is apparently not one of them. Paul Polman, head of Unilever, Paul_Polmanmade headlines a while back seeking a different set of shareholders who care more about the long-term growth of the company.

Few CEOs of his calibre would dare to suggest in public that, for example, the concept of shareholder value has passed its sell-by date.

Or tell the City it would get no more earnings guidance or quarterly financial reports. Or suggest hedge fund managers would ‘sell their own grandmothers if they thought they could make a profit’?

He has ended Unilever’s regular quarterly results, because these make it harder to pursue a longer-term strategy. Responding to such heretical thoughts, all kinds of investor’s, particularly hedge funds took their money and ran.

Yet this was much to the satisfaction of the Unilever CEO. He has since pointed to the changed and more beneficial shareholder structure that has resulted.

But shareholders have ways to pursue their often unhealthy short expectations. For example, they can shape a company’s remuneration scheme, forcing perhaps reluctant executives to focus on the short term.

Or they can combine to remove managers who don’t meet their investor expectations. The turnover of CE0s for example, has sharply increased in recent years, aiding and abetting short-termism.

However, the most pressure on C-level executives or board members to produce short term results is not from shareholders or outsiders, but from their own executive teams and boards.

pushing-backCountervailing forces

Apart from direct pressure from shareholders, other forces are pushing firms to think more about the short-term, and therefore perhaps to act less than ethically.

Polman of Unilever has also been a leading lights in drawing attention to short-termism as an organisational disease that needs radical treatment. He argues the ultimate cost was the financial crisis of 2008-9:

“Too many investors have become short-term gamblers: the more fluctuations in share price they can engineer, the better it is for them. It is not good for the companies or for society, but it is influencing the way firms are being run, all the same.”

Most C level executives surveyed in 2013 would not be willing to miss quarterly earnings by much to boost profits by 10 per cent over the next three years. This at least implies many would probably also be willing to compromise around issues to do with ethical performance.

The continued failure to focus on the longer term certainly explains some of the unethical choices made by companies of all sizes. The VW disaster for example was rooted in a short-term wish to make its cars seem better than they really were. Longer term of course, the damage caused has been catastrophic.

Financial fiddles in recent years—Libor, Forex, tax avoidance, mis-selling, getting around mortgage rules; tax inversions schemes in the US–all similarly arose from a rampant culture of short-termism. This is best summed up as:

“We thought we could get away with this.

Collapsed time horizons of business decision makers in so many large companies can seriously undermine their reputation and value. They also invite individual and institutional corruption. The recent troubles at Tesco for example with seriously mis-reported profits is just one example of how this may surface.

Another is the much reported GM ethical disaster over its faulty ignition switch. This too shows what happens when short term conflicts of interest cause ethical confusion.

In the case of GM, and in the earlier Ford Pinto disaster involving a faulty fuel tank, engineers and managers calculated the likely costs of legal action against the company remedying its faulty product.

Weighing these against the costs of taking remedial action led to a short term choice of devastating unethical consequences. These ultimately proved far more financially destructive than the originally rejected alternative ethical choice.

The shorter the time period chosen for measuring performance, the potentially bigger are the financial rewards. Together these provide an incentive for institutions and their executives to choose short-term rewards.

Latest victim of the urge for profits against a long-term perspective has been Anthony Jenkins ex CEO of Barclays. He came into office declaring he needed five years to turn the organisation around and bring back a more ethical approach. He lasted only three before being booted out for not bringing in profits fast enough.

No wonder  CEO and others resort to gaming society’s rules, tolerating institutional conflicts of interest, violating common decency or other standards of fair conduct, and resorting to cronyism as a way of maximizing results and self-interest.

Pressures to go for short termismSource: Short termism: Insights from business leaders, 2013 CPPIB and McKinsey & Company.

 CSR as a possible remedy

It’s been called the new Gold Rush. Dove, Chipotle and Patagonia are among some of the US companies trying to get out ahead of their competitors by aggressively backing social and environmental issues.

It used to be products and services that drove competition. But some experts say a new type of gold rush is unfolding, one in which brands race each other to claim an environmental or social cause. What makes this trend important is that there is no short term gain to be easily obtained.

Patagonia the clothing and gear company was one of the first to carve out a niche sustainability message with its commitment to responsible consumption.

It has pushed this in various campaigns over the past decade. Patagonia has seen double digit growth annually over the past five years. As one brand specialist comments:

“It’s the marriage of storytelling and integrity of what they’re doing that gives them credibility in the marketplace, and it lives in your mind,”

Pressure on companies to invest more of their energy and resources in socially responsible causes continues to grow.

“One of the big mistakes brands make is they dumb themselves down and play to the lowest common denominator by taking a profit mentality,”
Simon Mainwaring, CEO of brand consultancy We First Branding,

Plenty of research confirms companies that focus on their values and not just the bottom line, gain a competitive advantage—but it may time to emerge.

CSR is therefore becoming an important stimulus for companies to lift their collective sights, beyond a strictly short-term horizon. Taking a deeper, longer look at how to focus on social and environmental issues is not just “nice to have”. It actually produces a measurable competitive gain.

CEOs and Investment

Capital investment is an important way companies can expect to improve their long term competitiveness and capacity. But again the pressures are towards the short term.

Investors for example now hold stocks for a relatively short time compared to a few decades ago:

length of time stocks held

Such an intense focus on a relatively short time horizon means a company’s cash flow is valued far more in the short rather than the long term.

For example, investors treat cash flow projected five years ahead as if it’s really going to take eight years; while cash flow 10 years ahead is actually regarded as more than 16 years ahead. Hardly an encouragement for company leaders to invest for the long term.

Yet according to a recent EY study, a rise in capital expenditure can definitely increase total revenues and in the long run, market capitalisation. The catch is long term is perhaps around 15 years—far beyond the average tenure of those at the top of major corporations.

Shorter CEO tenure and neglecting the benefits of investments decrease a company’s long term value and profitability. They also damage the ability to adapt to new market conditions and to compete on a global scale.

Similarly, investing in human capital has long been seen as desirable, but hardly essential to good financial returns of a company.

Executives who want to improve short-term financial statements often have an incentive to save on the training of their staff. Or to refrain from recruitment. Both actions can temporarily reduce costs incurred by the company, but only by neglecting investment in human capital.

This negative approach is increasingly being challenged. The returns from winning employee engagement for instance are proving to be far greater than many companies realise. The gain is certainly quicker than the 15 years suggested by EY for an equivalent return on capital of staff

As for CEOs, the available research suggests the longer they’re in office the more likely the firm will make long-term investment decisions. In turn, these are what ultimately leads to increases in a company’s profitability and value.

short sightednessStrategy versus myopia

When two new chief operating officers arrived at the Blackberry Company, Research in Motion (RIM) in 2000/1 they found it

“…devoid of the practices that shaped modern corporate life…just a loose collection of short term plans discussed privately between RIMs co-chief executives.”
J.McNish and S Silcoff, Losing the Signal, Flatiron Books 26 May 2015pressure for results

Given the pace of change facing all companies, there is a limited ability to create meaningful strategy. This does not mean though, that a company should live as RIM tried to do.

Strategy plays an important part in ensuring a company has a suitable focus on the long term and is not unduly concentrated on the short term. Many governance arrangements for example do just the opposite.

For example, badly structured remunerations systems or undue emphasis on immediate financial returns to stakeholders may ensure leaders and managers stay myopic, concentrating on more immediate gains.

The shrinking tenure of CEOs is making the situation worse. If you’re gone from the job within five or six years, which is the current situation, why should you pay much attention to the next 10?

Why bother to devise a strategy to take into account the gains from acting long term when you’ll never be around to see the benefits?

“The global economic crash exposed the danger posed by short-termism… those who cut costs and overheads still seem to earn more respect than those who take the riskier, more innovative paths that lead to growth in revenue, profits and jobs.
Management 2020 Leadership to unlock long-term growth
CMI July 2014

The best business leaders know they should develop a meaningful long-term strategy for the companies.

Three positive actions to encourage this would be to have a more strategy-focused board committee; for the board to spend at least half its time on long-term issues; and thirdly to improve how the company reports on long-term issues.

Risk versus rewaTwo red dice engraved with RISK and REWARD roll on white background.rd

Companies focused mainly on the short term are actually making a risk versus reward calculation. More risk by going long term and reaping the benefits, must be weighed against the less risky gains from a shorter focus.

Anyone concerned with ethical issues, such as compliance and legal staff, need to grasp the implications of this ongoing risk reward calculation, even when it is not always explicit. Here are ten important implications for practical action:

time to evaluateIMPLICATION #1

When the equation comes out in favour of short termism this invites corrupt practices. It may not be deliberate but that can often be the results.

Be ready to challenge how the focus on short-term results may be unwittingly generating situations where ethical dilemmas arise, and how are these being resolved?

time to evaluateIMPLICATION #2

Be willing to actually examine the current role of company leaders and managers in making the risk versus reward calculation.

It is relatively easy, and even comfortable to sit back and say this is a strictly business calculation and should be left to those in charge.

Yet this is precisely when it is time to draw attention to what is happening, and be ready to issue suitable warnings, caveats and concerns.

time to evaluateIMPLICATION #3

If you have direct access to the C suite or the board, have the courage and confidence to come forward and show how risk is being distorted for a potentially unethical short-term often purely financial benefit.

“Short termism is one of the most disturbing problems affecting modern organizations and producing some of the most common unethical behaviours.”
Professor Lorenzo Patelli, University of Denver

time to evaluateIMPLICATION #4

To what extent is the risk/ reward equation leading to potentially damaging actions that cumulatively are damaging the corporate culture? For example, is the company really investing in its people or merely going through the motions?

Signs of longer-term thinking include a focus on improving levels of employee engagement, and ongoing investments in training and development.

time to evaluateIMPLICATION #5

Is strategy regularly discussed at board level? Does the board spend at least half the time doing that?

Simply asking this question regularly is a meaningful contribution to sustaining the ethical culture.

time to evaluateIMPLICATION #6

How effective is the current executive remuneration system in encouraging longer term thinking in the C-suite?

Again merely pursuing this question and being willing to dig deeper into it is a practical way to make your ethical presence felt right at the top.

For example, do long-term incentives exist across the board that deliberately encourage compensation for corporate executives and asset managers to achieve long-term strategic and value-creation goals?

time to evaluateIMPLICATION #7

How inspiring is the present leadership? It’s essential not to shy away from confronting this issue.

Is the leadership actively promoting longer term thinking throughout the company by sharing a vision of the future?

Or is most of the leadership constantly stressing results and particularly financial results? While these are obviously important to any business, they should not be the dominating force governing most managerial communications.

time to evaluateIMPLICATION #8

Can you help the company promote more meaningful, and potentially more frequent, communications about the company’s strategy?

In particular, can you be active in ensuring the long-term value drivers such as trust, employee engagement and other longer-term factors that can help reduce the company’s over dependence on earnings guidance?

time to evaluateIMPLICATION #9

What contribution can you make to promoting a broad education of all those in the company about the benefits of long-term thinking and the costs of short-term thinking?

While you may limited influence of training and development programs you can at least see they have the right emphasis injected into them.

Can you encourage the company to invest in education initiatives for individual investors too that guide them to focus on long-term value creation?

time to evaluateIMPLICATION #10

Encourage colleagues to consider social and environmental issues to which the company might make a constructive contribution.

There is ample evidence these can actually produce a measurable competitive gain.


Andrew Leigh
Andrew Leigh
ANDREW is author of Ethical Leadership, (Kogan Page 2013) and writes regularly at He believes business needs to re-discover the importance of ethics and integrity. As an expert on leadership Andrew writes regularly on ways to help managers be more effective as ethical leaders. His blog stays close to the zeitgeist with a unique perspective on many aspects of leading organisations ethically, including compliance, and engagement. Andrew is a joint founder in 1989 of Maynard Leigh Associates ( pioneers of using ideas from theatre in business. He was a hands-on practising manager for many years in the public sector, ending his time on the front line running a division with over 1000 staff. Andrew also spent several years as a business and financial journalist, including time at The Observer newspaper. He has written over 20 books on management, leadership teams and so on. Originally trained as an economist, he is a Chartered Fellow of the Chartered Institute of Personnel and Development. He is available for speaking engagements, interviews, feature articles and consultancy.

SOLD OUT! JOIN OUR WAITING LIST! It's not a virtual event. It's not a conference. It's not a seminar, a meeting, or a symposium. It's not about attracting a big crowd. It's not about making a profit, but rather about making a real difference. LEARN MORE HERE