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Schumpeter Essay

1884 words - 8 pages

Schumpeter: Taking the long view | The Economist

24/08/13 12:14 AM

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Schumpeter

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Taking the long view
The pursuit of shareholder value is attracting criticism—not all of it foolish
Nov 24th 2012 | From the print edition
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In this section Collectors, artists and lawyers A Wall Street brawl Fallen idols Of corner offices and cribs

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Schumpeter: Taking the long view | The Economist

24/08/13 12:14 AM

Federation of Austrian Industries urged the world to abandon it. Rick Wartzman, the director of the Drucker Institute, said its critics were gaining momentum. The cult has certainly yielded perverse results. The fashion for linking pay to share prices has spurred some bosses to manipulate those prices. For example, a manager with share options gets nothing if the share price misses its target, so he may take unwise risks to hit it. Short-termism is rife on Wall Street: the average time that people hold a stock on the New York Stock Exchange has tumbled from eight years in 1960 to four months in 2010. The emphasis on short-term results has tempted some firms to skimp on research and innovation, robbing the future to flatter this year’s profits. “Long-term results cannot be achieved by piling short-term results on short-term results,” Drucker once remarked.

Foreigners beware Fiery food, boring beer The new maker rules Poking Walmart, choking Twinkies Taking the long view
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One study shows that listed companies have invested only 4% of their total assets, compared with 10% for “observably similar” privately held companies. A second shows that 80% of managers are willing to reduce spending on R&D or advertising to hit the numbers. John Kay, a British economist (and author of a government report on shorttermism) argues that the pursuit of short-term profit may have undermined two of Britain’s greatest companies, ICI and GEC. But hang on a second. Are the critics really right to argue that modern capital markets invariably put short-term results before long-term ones? Amazon has never found it hard to attract investors, despite the way it ploughs its profits into long-term plans for world domination. Plenty of other tech stocks are wildly popular despite negligible short-term returns. And are companies always foolish to react sharply to short-term warning signs? Nokia, a Finnish telecoms firm, would be much healthier today if it had reacted more swiftly to market warnings, rather than keeping a second-rate boss in place while Apple destroyed its business. The critics make a distinction between long-term value (good) and short-term value (bad). But what is long-term value if not short-term results piled upon each other? And what is wrong with making regular checks on your performance? A company’s quarterly results will probably tell you something about its long-term health as well as its performance over the previous...

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