Corporate America has a worsening case of short-termism. A 2005 survey of more than 400 financial executives revealed that 55 percent would delay starting a project with a positive net present value in order to avoid falling short of quarterly consensus earnings.
In response, a small group of businesspeople has set out to find a cure. In May 2005, the Business Roundtable Institute for Corporate Ethics at the University of Virginia and the CFA Centre for Financial Market Integrity created a task force to recommend ways to combat the fixation on short-term performance at publicly held companies.
The task force’s recommendations, released last month, fall into five broad categories: earnings guidance, incentives and compensation, leadership, communication and transparency, and education. “In each, we talked about the role that the others can play,” says Matthew Orsagh, senior policy analyst with the CFA Centre. For example, moving away from a focus on quarterly earnings would require compensation plans and investment materials centered on long-term value creation.
Panel members aren’t advocating additional regulation. Instead, Orsagh says they hope market participants will take the lead in concentrating on sustained value creation, not short-term performance.