Is corporate thinking too short-term?

That is the topic of my latest Bloomberg column, here is one bit:

Still, it’s not been established that American corporations are on average more short-term in their thinking than they ought to be.

Perhaps most importantly, it is often easier and better to plan for the shorter term. 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.

There are many other points of interest.  I would note that from a social welfare function point of view, everyone thinks in too short a term.  But from an agency point of view, I also see a lot of excessive long-term thinking in corporations:

Many tech startups have high valuations even though revenue is zero or low. Again, those judgments may or may not be correct, but clearly investors are trying to estimate longer-run prospects. During the dot-com bubble of the 1990s, there was too much long-run, pie-in-the-sky thinking and not enough focus on the concrete present.

Comments

Only loosely related to the above, but relevant for previous technology posts. Designers and tech specialists are calling for more regulation of the Internet of Thing because the market cannot guarantee sufficient security. What are your thoughts about this?

"Much has been written about how the IoT is wildly insecure. In fact, the software used to attack Krebs was simple and amateurish. What this attack demonstrates is that the economics of the IoT mean that it will remain insecure unless government steps in to fix the problem. This is a market failure that can't get fixed on its own. "

http://motherboard.vice.com/read/we-need-to-save-the-internet-from-the-internet-of-things

The same thing is being discussed on Slashdot. https://tech.slashdot.org/story/16/10/07/1934223/bruce-schneier-we-need-to-save-the-internet-from-the-internet-of-things

I'm a total amateur, but isn't this Coasean thinking?

"So fine the people who own the devices. Start with a small fine, like $10, then double it for each repeat offense. Eventually, the word will get out, people will stop buying products from that vendor, and sales will suffer. They won't have any choice but to make their products secure."

I think you are right -- but the politics is tricky. Consumers whose devices host DDOS code will not like being fined, and collectively they have a lot of votes.

For IoT and some other things we might get away with fining the makers every time one of their devices is caught host a DDOS. But then the maker's efforts are as likely to go to de-fanging the legislation as they are to improving their devices.

Far more likely is a regulatory non-solution for IoT devices, which will sew up the market for favoured vendors but still not provide good security, because attackers will always be inventing new attacks while vendors merely have to satisify existing regulations. But such a "solution" is easy to implement given existing political instutions.

This is pretty much par for the course. Some new, dramatic thing occurs on the internet and the usual suspects immediately declare that the only way to fix it is government intervention. Meanwhile, the players who all have something to lose recognize that if they dont fix the problem they will suffer. By the time the government finally gets around to noticing, the industry will have sufficiently mitigated the problem that its no longer a big deal.

I'm a cuck

So, Takada corrected the design problem in its airbag inflator back in 2006, just a few years after the problem became know to the car makers, and it was government interference that forced Takada to go back to its bad design and restart manufacturing in order to satisfy regulator demands to have a problem to screw up?

VW long ago had robust diesel engine design that did not pollute but the EPA forced them to include cheats in the engine control system to cause pollution so the EPA could screw things up?

Is this why "they dont make em like they used to" eg. dishwashers and washing machines, less long term thinking. I thought because they're more energy efficient (though are they if replaced more often?) What goods work well to be thought of as long term? Med products like knees seem ideal to have a long horizon but is an immobile long tail production of dishwashers and knee caps able to stay innovative?

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" I don’t think economists have a good standard yet for judging whether corporate decisions are too long-term or too short-term. "

And just why has the vast, longstanding economics profession failed in this area ??

Are credentialed economists supposed to 'judge' corporate decisions..... or rather provide sound economic principles upon which those managerial decisions can be well made ?

I don’t think economists have a good standard yet.

Corporate thinking is excessively long-term.

A company that is good at one thing typically pisses away a ton of its cash trying to find the 'next thing' to ensure its continued corporate existence. The 'next thing' is not much related to the thing it was good at in the first place and would is better done by someone else.

It instead should be managed as a cash cow, with an accepted and managed declined, with the cash returned to investors for them to find the 'next thing' themselves.

In the early part of last century, businesses were built into huge conglomerates 'to diversify returns'. Then investors realised that they could do that via portfolios. Similar thing here, but over time.

Yes agency effects often lead to companies holding onto more of the revenues than would be justified. From an individual investor point of view this is detrimental, but probably for society overall it is useful since this investment in future products often yields societal benefits. A good example is Bell Labs.

On the more general point, it is nonsense to claim that corporations can't undertake long term projects, in oil and gas for instance it can take more than 10 years from first exploration well to first oil, and then perhaps another 30 or 40 years before the investment is repaid. In many parts of the world toll roads are built and financed by private companies where returns are calculated in 30 or even 50 year basis. Power stations are also similarly financed in many parts of the world.

I suspect what Clinton and other folks are saying, is that they should be allowed to make decisions on investments, not individual investors. I can't think of policy that would be better at creating short term thinking by investors, this one being to sell up everything and put the money in the Swiss Bank Account.

This understanding is exactly what Warren Buffett has built with Berkshire Hathaway. The company structure allows him to allocate capital to the unit that can best utilize it, regardless of which unit generates it. A good example is See's Candy. It generates far more cash every year than is needed to continue the business, has limited expansion ability, but Buffett can deploy that cash to other arms of the business. Apparently since 1972 See's has generated well over $1B in excess profits that Buffett has deployed elsewhere, rather than trying to expand the candy business.

http://www.gurufocus.com/news/240914/candy-cash-flow-the-secrets-to-sees-candy

I work in a big corporation. Different board members and different departments have totally different orientations re short-term vs. long-term.

Any analysis that relies on personifying corporations and then looking for anecdotes which can be classified as short-term or long-term thinking is not going to get very far.

Corporations are complex, social organizations, not simply the apparatus with which some dictator CEO executes his personal vision. Change initiatives and strategy ideas come from all levels of management, not just the top. Some CEO-driven ideas are lame, and they just fizzle out when they're not supported by those below. There's a constant tension between different corporate functions.

'Still, it’s not been established that American corporations are on average more short-term in their thinking than they ought to be.'

Just look at the Dow Jones Industrial Average - why, all the companies in it are clearly not involved in short term thinking. Of course, it helps to remove the failures - Enron, AIG, etc. Along with changing the composition - https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average#Former_components

'In information technology, the average life of a corporate asset is about six years'

Not precisely - a significant number of absolutely critical systems have considerably longer life spans, which can be measured in decades. As noted, oddly enough, by Bill Gates when talking about his envy of IBM, which was making 25 billion dollars a year from MVS / os/390 licensing over a couple of decades (cannot find the precise quote unfortunately, but it shows Gates understood the value of a good monopoly when he saw it - IBM was basically printing money year after year - and still is when it comes to what is now called z/OS). https://en.wikipedia.org/wiki/MVS

And in reality, it is still not exactly uncommon to find companies using IBM's AS/400 (the original name) - a system that IBM recommended, in the interest of system performance, to do an IPL at least once a year. IPL (Initial Program Load) essentially being the same as rebooting in the PC world.

Though it is true that such hardware/software has been long fully depreciated.

(And this is not even to talk about the wonderful thing that is SAP's R/3, and how it too has not exactly changed its core over the last couple of decades, regardless of what SAP's customer might believe with the latest rebranding.)

I remember a Japanese (Sony, Mitsubishi, ???) top manager saying in an interview: "We plan on timescales of hundreds of years." Unfortunately I can't find that quote online.

Sony was famous, back when it was an important (electronics manufacturing) company, for having a 500 year plan. I was going to comment that I wonder how that's working out for them, but you beat me to it.

And see what happened to Sony

"I would note that from a social welfare function point of view, everyone thinks in too short a term. "

Are you saying this from the perspective of Deep Concern for the Future, i.e., that the discount rate on future social welfare ought to be near zero or at least much less than typical financial discount rates? If so, why do you think *everyone* is setting this particular discount rate too high? Is it just a basic cognitive bias, insufficient philosophical reflection, or something else?

The social discount rate is lower than the private discount rate because "one man gathers what another man spills".

On the "is investor thinking too short-term" side, couldn't we get something of a test of this by checking whether high P/E firms out/underperform low P/E firms on average? Or insert some other valuation metric?

If thinking is too short term, I'd expect firms whose valuation is "high" vs their current fundamentals (indicating investors expect superior long-term growth) to outperform, and if too long term to underperform.

Obviously some holes there.

More of TC's meaningless mumbo-jumbo. Although in fairness I should read his Bloomberg piece. 1. A corporation doesn't "think", people, or rather individuals, do. 2. Corporate policies and objectives (and culture and decision makers and metrics) are fluid, it is unlikely imho that this can be usefully captured. 3. Without clear distinction between what is and is not "short-term thinking" claiming an organizations practices too much of it is mumbo-jumbo, plain and simple.4. Is "short-term thinking" the same for Sony (with its 500 year plan, LOL), Microsoft, Exxon-Mobil as it is for Uber and Theranos and Blackberry? American Apparel, Republic Airlines, Arch Coal and Colt Defense? As said by others, not only does it matter what the environment is for the corporation, but what the environment is for the thinker: I'm betting a customer service representative spends little time on "long-term" planning, while a CEO, CFO, CTO, and COO may just spend a bit more on it.

"A study from the John M. Olin School of Business at Washington University estimates that 40 percent of today's F500 companies on the S&P 500 will no longer exist in 10 years." - Peter Diamandis

Does this mean long-term planning is irrelevant or more important than ever?

Check out the advertising in a copy of Fortune from the 1960s. Very few of those corporations are still in business.

Yet Brazil is still here and always will be. Three Romes have fallen, there won't be a fifth.

Stupid data. Includes M&A. That is not the same as bankruptcy

Investors value long-term results and discount future cash flows fairly rationally. However, information is provided on a short-term quarterly basis.

Good managers like Bezos have investors trust that they will realize future returns. Poor management does not and feel pressure to meet quarterly numbers as an indicator that they're on track to hit long term goals.

Poor management thus complains about short-termism. Matt Levine had an article a few weeks back laying out a similar point.

Do we have any good evidence of successful long term thinking? I'm a bit at a loss, perhaps the pyramids which maybe took a generation each to build?

In terms of companies that have been successful for a very long time, Walt Disney, Coke Cola, Apple, Microsoft...do we see long term thinking or a series of short term shots some of which miss and others hit? Evolution itself proceeds very short term, no modification happens because it works in the long run, only short run.

Early in my career I worked on operational financial plans for my company (P&C insurance). A high level of focus was put on the 1 year plan (premiums, rate activity, retention, loss trends, expenses...) We would also create a 5 year plan that nobody took literally. Often the 1 year plan would not survive the year depending on events.

My general observation was that most of the key leaders were incented to reach 1 year goals and cared little for how decisions made now would impact the company in 5 years. It was a "get what you can now" mentality - likely driven by the incentive structure imho. My perspective from a distance was that this was particularly true in the years leading up to a senior executive's retirement. You could tell it was coming because suddenly underwriting guidelines would be loosened, and rate activity taken - things that would drive short term top-line growth at the expense of longer term issues (which the next guy in line would have to clean up after retirements).

"Therefore no plan of operations extends with any certainty beyond the first contact with the main hostile force." -- Helmuth von Moltke the Elder
"But have you cleared it with the Russians?"-- legend has it that famous Brazilian soccer player Garrincha asked the couch after his detailed explanation/speculation about what the Russians (Soviets, in fact) would do and how Brazil should counter them.

Missing from most discussions of investor short-termism is that a short term investor still has to sell to someone. That next investor will care what happens to the firm during his holding window, including what the expected sale price will be at the end, and that determines what he will be willing to pay. And that expected sale price at the end is determined by what the second next investor is willing to pay.

So, even if shares are held be a succession of short-term investors, the need to sell should push them to care about the firm's long-run profits. For investor short-termism to have an effect, then, investors must also be stupid.

No doubt investors are "stupid" in the sense of being ignorant of how precisely the future would play out. But, as TC points out, that type of stupidity leads to efficient decisions, not inefficient ones.

My bit of inside experience with top executives of a publicly traded company is that they complained a lot about Wall Street being overly focused on their mediocre short term quarterly results instead of on their brilliant long term strategy. But it turned out in hindsight that the quarterly results really were clues that their long term strategy wasn't going to work very well.

Apply this to the sanguine views on the contributions to society of immigrants...?

In VC backed startups, if anything, we focus more into the long term. When all we look for is companies that are going to be worth 1B+, then you have to give them time, and ignore short term profits. Plenty of companies out there that were worth over a billion in their last investment round don't have profits 5 years in. When you want 10B or 100B, You are going to be burning money for more than that. But the rewards of being a venture fund that holds a lot of equity in a 100B company is not just great returns for investors that year, but great at attracting another decade of risky bets: That's why we are seeing firms take incredible amounts of risk and doing badly.

It's a bit like how amazing performance once can get a lot of forgiveness of bad performance later. Look at Bridgewater Associates: They did an awesome job right at the start of the great recession, so Ray Dalio looked like a genius. If you look at their returns since, they've been terrible: Terrible enough they'd be closed if it wasn't because people still think he might time the next recession.

We also see crazy planning in corporate land. Your typical gigantic enterprise will make long term plans that will only be followed in the first 6 months or so, because that's the time between internal reorgs, and every manager under the C level is reorged. Now, you could argue that everyone knows the plans are just for show, and that really, all everyone is doing is looking for ways to please the boss to be placed slightly better on the next reorg, but it's kind of amazing how good people are at pretending to care about plans that never get implemented.

The late 1990s were too frothy.

Corporate thinking is too short term. Namely, they have to meet quarterly and annual results, and bonuses are based on these, and SURPRISE!!!!! people work to the incentives. Ergo, corporate thinking is too short term. But if everyone else is thinking that way, there are few pathways to profit other than to get in ...

Both are true.

Whether it is short-termism on average is an endless debate. The key issue is rather why a large subset of firms seems to take short term decisions. The stock market is clearly fed up with many management teams, but why do they persist?

Frankly speaking, it’s really often to do the guess work, but we got to be very wise with how we go about doing everything. I am grateful to my broker OctaFX because they support me to every stage whether it’s through their mighty educational setup covering all stuff or if it’s to do with their weekly based cTrader demo contest, it’s just fascinating to be part of such caring company that helps me in every way and allows me to work tension free.

This reminds me of something my law instructor informed my class a couple weeks ago. It’s more efficient to make long-term plans than short, since there is less risk in making bad ethical decisions.
So, it could be that corporations lean toward long-term thinking relative to their industry. That just the jist of it though and I’m still learning! With how quickly technology is advancing I can see why IT and healthcare may consider short-term.

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