July 31, 2005

More on Time Horizons

Social investors are not the only ones concerned about Wall Street's increasingly short-term outlook. Alfred Rappaport of Northwestern's Kellogg School of Management has written an interesting article on short-termism. Rappaport is one of the foremost teachers of discounted cash flow analysis (he wrote the book), but finds in his review of the literature that its use is limited. Instead, investors seem to prefer earnings-based indicators, like P/E and earnings surprise. He believes the "root cause of recent corporate scandals [is] the widespread obsession with short-term performance. There is no greater impediment to good corporate governance and long-term value creation than earning obsession." It is a remarkable state of affairs when economists like Cameron Hepburn argue that DCF analysis is too short term-oriented, at the same time the chief proponent of DCF says it is under-used because it is not short-term enough! What everyone seems to agree on is that Wall Street's concern is with the next 20 minutes. If you're looking for someone to worry about the next 20 years, you've come to the wrong place. Today I read a similar sentiment from a very different source. Terrence Deal and Allan Kennedy wrote the influential Corporate Cultures in the early 80's, and updated their work with The New Corporate Cultures, which came out in 2000. The latter book ends with this comment: "We are optimistic enough to think that we may be nearing the end of a cycle emphasizing the short term over the long term and shareholders over all other valid claimants for their share of the corporate pie. As this troublesome cycle abates, management decisions will show more balance, shaking off some of the recent excesses."


Blogger Lloyd Kurtz said...

A comment from Dr. Raj Thamotheram of
USS Ltd in London:

Lloyd, your take on Wall St and extra-financial issues (EFIs) is spot on but do you want these barriers to be overcome? If so, the critical issue is, as you say, a matter of incentives. Fund managers pay significant fees for research (generally bundled and hidden). Few have credible systems for rewarding brokers for covering EFIs. And if clients are not willing to do this, can we blame our service providers? Hence the Enhanced Analytics Initiative. EAI members allocate 5% of our fees to best in class brokers and are so creating a business case for action. This is already having an impact in Europe: according to the 2005 Thompson Extel SRI survey, 80% of respondents said EAI was already helping to make SRI become more mainstream. Would SRI fund managers like to see this happen in the US too?

Sounds like a great idea. - LK

10:39 PM  

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