Published in, Forbes

By Stuart R. Levine

There is positive change happening in the business world as more and more companies and investors adopt a longer-term holistic view of investment return. There’s increasing awareness that excessive concentration on short-term earnings causes inadequate attention to strategy, business fundamentals and enduring value creation. In fact, empirical evidence demonstrates that short-termism results in lower overall long-term returns to shareholders and has a negative effect on national productivity, wages and employment.

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The expectations of shareholders and other stakeholders are extending beyond near-term bottom line results . Taking the long view, managers, boards and investors are becoming more in tune with environmental, social and governance issues. Long-term strategy increasingly takes social responsibility into account, and contribution to society is foundational to a company’s mission and values.

Larry Fink, Chairman, CEO and Founder of BlackRock Inc. says it well in his recent annual letter to CEOs: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” Furthermore, BlackRock investment stewardship seeks “engagement with investment companies” to “encourage business and management practices that support sustainable financial performance over the long-term”, and to “provide specialist insight on environmental, social and governance (ESG) considerations to all investment strategies”.

BlackRock’s sustainable long view makes great sense. It is not hard to see how a short-term perspective can harm long-term results. Short-termism causes companies to delay or eliminate investment that will produce long-term returns but result in short term earnings suppression. Short-termism leads companies to distribute earnings instead of using them for capital investment and innovation. Or they sacrifice investment in employee development to bump up earnings per share, as personnel expenditures involve a near term cost, but take time to show results. Moreover, when faced with a revenue downturn, eliminating staff is a quick bottom-line fix, but often leaves the company with a longer-term skill shortage. Short-termism pushes senior people to provide near-term earnings boosts that then fizzle due to lack of effective investment for the long term. C-Suite turnover often results. Short-termism, in short, is not rooted in mission and values.

A positive outcome for all the company’s stakeholders requires senior management and the board to see the alignment between the interests of shareholders and the other stakeholders. They share the goal of sustainable, long-term value creation, evidenced by rising market capitalization and return on investment. Data show how long-term ROE and market cap are positively affected by investment activity, however, short-run earnings may be diminished. This makes senior management’s effective engagement with the investment community essential.