The reasoning over short-term orientations is deeply flawed, writes Alfred Rappaport
Why do companies obsess over quarterly earnings and fail to invest adequately in long-term growth? And why would a company such as Volkswagen lie to its customers and government emission testers? Conventional wisdom places the blame squarely on the pursuit of shareholder value which, it is claimed, has fuelled pernicious short-term thinking and irresponsible behaviour.
That is wrong. The culprit is not shareholder value but rather corporate executives, investment managers and the business press who incorrectly believe that the governing objective of shareholder value is to boost a company’s near-term stock price by meeting the market’s quarterly earnings expectations. This misguided thinking has hijacked the good name of “shareholder value”. Consequently, companies commonly “talk” shareholder value but “walk” quarterly earnings in their everyday operations.
Let us be clear what managing for shareholder value really means. It means focusing on cash flow, not earnings. It means managing for the long-term, not the short-term. And it means that managers must take risk into account in their capital allocation decisions. Properly implemented, there is no better cure for short-termism than managing for shareholder value with its long-term orientation.