Since 2008, our economy has appeared to gather steam. Wall Street’s historic highs have been justifying to complacency about our future. Once again, it looks bright. And yet many of us have begun to recognize that something is deeply flawed in this superficially hopeful vision of our economic prospects. Wages have been virtually stagnant, in comparison with productivity, for decades. Across America, unrest drove the presidential election and the fuel of that discontent was largely economic. Why this disconnect between Wall Street and the rest of the country?
For decades, we have been extracting profit from a system that is increasingly cannibalizing itself. Two forces, have been working hand-in-hand to erode the bedrock of our capitalist free market system: shareholder primacy and short-term thinking. Where you find one of them, you’ll almost always discover the other. In order to drive up stock values from one quarter to the next, we’re keeping wages down, putting a lock on hiring, and engaging in financial engineering to prop up the bottom line. All of these measures yield both quick profit and long-term decline. Wall Street rewards the profit and ignores the decline.
Economically, we’ve burned through the fat and now we’re wasting muscle.
Finally, we have a rigorous study to show how foolish and destructive this sort of thinking is. McKinsey Global Institute has examined a cross-section of 615 American public companies from 2001-2015. From that data, they’ve created an index that shows the results companies get when they push back against short-term pressures and manage for the long term. (This is no small feat, by the way. The study reports that 87 percent of executives and directors feel the heat from shareholder activists to get significant results in less than two years.)
The researchers conclude that, by nearly all measures from year to year, executives who stay cool and resist pressure for quick results lead companies to consistently perform better that the ones focused on the next quarter. Here’s an overview of the findings. Long-term firms:
- Cumulatively increased their revenue, on average, 47 percent more than the rest. Their profit grew by 81 percent more on average.
- Invested almost 50 percent more on R&D than other firms from 2001 to 2014.
- Increased market cap by $7 billion more than that of other firms between 2001 and 2014. Although they took bigger hits to their market capitalization than other firms during the financial crisis, their share prices recovered more quickly after the crisis.
- Added nearly 12,000 more jobs on average than other firms from 2001-2015. Had all firms created as many jobs as the long-term firms, the US economy would have added more than five million additional jobs over this period. On the basis of this potential job creation, this suggests that the potential value unlocked if all companies took a longer-term approach would be have been worth more than $1 trillion in US GDP over the past decade. If long-term thinking were embraced universally, it would be worth nearly $3 trillion through 2025.
While all of this is extremely encouraging for those of us who have been waiting for hard data to show the merits of long-term strategies—as a way of pushing back against shareholder primary—the report is deeply troubling. The McKinsey researchers report that, just prior to the 2008 economic collapse, firms in general were moving more toward long-term thinking. Numbers on fixed asset investments were rising. Yet following the crisis, short-termism returned with a vengeance and, since then, has not only prevailed but increased.
One aspect of long-term thinking is a recognition of how success depends entirely on the people you employ. They aren’t your most important resource; their creative, customer-centric devotion to a company’s mission are the source of your success. With a long-term strategy in place, employers recognize the value of higher wages and more generous compensation and benefits. They will also invest in the research that gives rise to new products and services and creates new markets. Considering the growth in employment at long-term companies—if the mentality were to spread throughout the private sector—would generate a wave of new employment far beyond what we’ve been experiencing over the past decade.
In other words, long-term thinking is the key to the sort of economic revival and growth America clearly wants now. Let’s hope our private sector wakes up to all of this and takes a stand against shareholder primacy for the sake of its own growth, as well as for the sake of economic system as a whole.