THE sheep in “Animal Farm” repeat the slogan, “Four legs good, two legs bad”. In the management world these days, the chant is “Long-termism good, short-termism bad”. TheHarvard Business Review constantly thunders against the evils of short-termism.
Perhaps the strongest argument for rewarding long-term investors is that they think more about sustained growth, whereas short-term ones will sacrifice this for a quick buck. This is true if companies do not trade in their own shares
Companies repurchase their shares when they think they are cheap, as a way of benefiting their long-term holders at the expense of those who sell. As it happens, their timing is often poor. However, what is more important is that the cash they spend on repurchases could often have been used on expanding into new markets, or on research and development, to generate long-term growth. One study found that a doubling of repurchases leads to an 8% fall in spending on R&D
Long-termism and short-termism both have their virtues and vices—and these depend on context. Long-termism works well in stable industries that reward incremental innovation. But it is a recipe for failure in such businesses as social media, where firms are constantly forced to abandon their plans and “pivot” to a new strategy, in markets that can change in the blink of an eye