Short-termism is real

 Short-termism is real. The perception of the corporate sector, investor participation levels, and other long-term trends highlight the pressures companies face and the sacrifices they must make (tradeoffs).

The investment value chain has three fundamental participants: companies, asset owners, and asset managers. In the past, leaving companies to deal with short-termism alone has not proven to be an effective strategy, as institutional investors tend to hold their stakes for shorter periods, while activist investors wait.

To create real transformation, a paradigm shift is necessary. Asset owners who control capital have the power to change this situation.

Understanding the necessary nature of this shift, a group of asset owners presented several recommendations so that the asset ownership community can adopt the principles of a long-term vision.

In this transition to a long-term approach, it is important to incorporate long-term metrics that are industry-specific and based on sustainability. These metrics are as important as generally accepted accounting principles (GAAP) if we want to follow an investment process that generates long-term results.

In this transition to a long-term approach, it is important to incorporate long-term metrics that are industry-specific and based on sustainability. These metrics are as important as generally accepted accounting principles (GAAP) if we want to follow an investment process that generates long-term results.

Short-termism is seen as a problem, as it can weaken economic growth in the future due to a lack of long-term investment, which would lead to lower GDP growth, higher unemployment, and lower future investment income for savers.

In 2013, consulting firm McKinsey and the Canada Pension Plan Investment Board (CPPIB) conducted a global survey with interviews of more than 1,000 board members and senior executives to measure their long-term vision in managing their companies.

The research was published by McKinsey Quarterly, and the study's authors (Bailey and Godsall) confirmed the pervasiveness of short-termism in the current corporate mindset.

For 63% of respondents, the pressure to generate solid short-term results has increased in the last five 

Governance is the sustainability measure considered by most investors to be the most important variable for a company's performance. Governance issues have been at the forefront for longer, and therefore, investors are more familiar with them than environmental and social issues. However, knowledge about these factors is growing.

79% feel pressure to demonstrate solid financial returns over a period of just two years or less.

44% use a time horizon of less than three years to establish their strategies.

73% believe they should use a time horizon longer than three years.

86% of respondents believe that using a longer time horizon to make business decisions would have a positive impact on company performance in several ways, including strengthening earnings and increasing innovation.

46% state that the pressure to achieve solid results in the short term comes from management, while board members state that they are simply channeling the pressure they feel from institutional investors

The results were alarming and revealed the profound influence of short-termism on corporate culture. The root cause of the problem is believed to be the enormous pressure public companies face from financial markets to constantly maximize short-term returns. Not only do perceptions and research reflect this short-term focus, but empirical data also seems to support this idea. There has been a substantial increase in the rate at which individual stocks change hands, which is often cited as evidence that U.S. institutional investors have adopted a "trade" rather than a "buy and hold" mentality, putting pressure on companies to meet short-term performance targets or risk losing investors. Indeed, it is possible that some of this turnover stems from high-frequency electronic trading. However, this cannot be the only factor driving this increase, considering that the annual turnover of shares traded on the New York Stock Exchange (NYSE) increased from 36% in 1980 to 63% in 1996, and to a maximum of 138% in 2008.