CEO income is largely linked to the short term stock price and investments which have a return that’s not legible on short timescales to outsiders of the company are thus not in the interest of the CEO.
This is coupled with investors holding stocks for lower timeframes and thus caring more about the short-term stock price then the longer term stockprice.
Rant on the way, not an exhaustive list by any means! I kinda extrapolated ‘short-termism’ to mean lack of investment and more so a lack of results in technological progress—as I see the critique or ‘short-termism’ to really hit hard in the idea that companies aren’t investing when they should to make technological progress.
Perhaps it’s the market working as intended, value outperforms growth in the long term, and growth necessitates higher investment to expand. Doubtful, as no one outside of hardcore finance guys know about this anyways.
Perhaps it’s companies becoming more beholden to financial interests in Wall Street—increasing financialization. One of the simpler explanations, but I’d argue that not much has formally changed on this front, and convention is going in the opposite direction. Additionally, if we’re talking about long term technological progress—government, private, and academic progress hasn’t been obviously faster than ‘short term’ public companies, in my opinion at least, I could easily be corrected here.
Paradoxically, as markets get more competitive, economic profits decrease and investment capital dries up. This would necessitate a shorter term outlook to simply survive or profit at all. I don’t favor this one either, if anything natural monopolies are more common when complexity and scale really start ramping up—see Apple or Google.
When interest rates go up, future earnings are more heavily discounted (aka: money now>>>money later, as opposed to money now>money later). Probably the easiest one to strike off, unless you’re an inflation truther, lol.
My pet theory is as follows: we have orders of magnitude more scientists and researchers, rGDP is much higher than in the past as well. Yet, outside of IT, earth shattering innovation that reaches the market has been lacking in recent decades (debateable, surely, again my theory here). This leads me to believe that we are simply running out of “low hanging fruit,” or we are looking in the wrong places. Or it’s so complex, that scientists are forced to specialize to such a degree as to render their findings realistically irrelevant. I think this is among the simplest explanations for the apparent stagnation in technological progress.
Allow me to pick a bone here though, as I (largely) take issue with the premise to begin with. A company has a fiduciary duty to its shareholders. As the other commentator touches on, there’s pressures on CEO’s and corporations to show results. None of this has changed significantly in recent years, in fact I’d argue pushes towards ESG and ‘stakeholder capitalism’ are now working in the opposite direction of pure shareholder value. I don’t put the blame entirely on companies, because if they legitimately saw value in long term high R&D spending, their shareholders should be convinced to see that, and failing that, they could carry out said duty and stick to their guns. Not an easy thing do, however. Tesla’s shareholders seem to see it, likewise investors saw the value in the tech bubble, EV’s, green energy, crypto, biotech etc (ARKK anyone?). Capital is pouring into smaller, nimbler, forward thinking (perhaps to a fault?) companies, elevating multiples to bubble territory in some cases. The companies are there, the (investment) money is there, where I see the problem is largely either the execution or the feasibility of many of these ideas. Or maybe somewhere else, I won’t pretend to be more than an amateur in anywhere but Economics. That’s not to say that every company is doing it perfectly, but in the long run those that have a vision and an execution will win out. Disclaimer: I’m a finance guy, not an inventor or scientist, and probably quite obviously not a competent rationalist either.
I don’t put the blame entirely on companies, because if they legitimately saw value in long term high R&D spending, their shareholders should be convinced to see that, and failing that, they could carry out said duty and stick to their guns.
If a company has a secret project which they believe will revoluationize everything in a few years, then it’s worthwhile for them to be not fully open about the fact. Given current regulations they are not allowed to secretly telling their biggest shareholders either because that unfairly gives them benefits that smaller investors don’t get.
An investor has no way to evaluate whether the money that goes into secret R&D is well-spent or isn’t while the CEO has a much better idea of the merits of the secret projects inside the company.
Any ideas on what may have caused companies to trend towards short-termism?
CEO income is largely linked to the short term stock price and investments which have a return that’s not legible on short timescales to outsiders of the company are thus not in the interest of the CEO.
This is coupled with investors holding stocks for lower timeframes and thus caring more about the short-term stock price then the longer term stockprice.
Rant on the way, not an exhaustive list by any means! I kinda extrapolated ‘short-termism’ to mean lack of investment and more so a lack of results in technological progress—as I see the critique or ‘short-termism’ to really hit hard in the idea that companies aren’t investing when they should to make technological progress.
Perhaps it’s the market working as intended, value outperforms growth in the long term, and growth necessitates higher investment to expand. Doubtful, as no one outside of hardcore finance guys know about this anyways.
Perhaps it’s companies becoming more beholden to financial interests in Wall Street—increasing financialization. One of the simpler explanations, but I’d argue that not much has formally changed on this front, and convention is going in the opposite direction. Additionally, if we’re talking about long term technological progress—government, private, and academic progress hasn’t been obviously faster than ‘short term’ public companies, in my opinion at least, I could easily be corrected here.
Paradoxically, as markets get more competitive, economic profits decrease and investment capital dries up. This would necessitate a shorter term outlook to simply survive or profit at all. I don’t favor this one either, if anything natural monopolies are more common when complexity and scale really start ramping up—see Apple or Google.
When interest rates go up, future earnings are more heavily discounted (aka: money now>>>money later, as opposed to money now>money later). Probably the easiest one to strike off, unless you’re an inflation truther, lol.
My pet theory is as follows: we have orders of magnitude more scientists and researchers, rGDP is much higher than in the past as well. Yet, outside of IT, earth shattering innovation that reaches the market has been lacking in recent decades (debateable, surely, again my theory here). This leads me to believe that we are simply running out of “low hanging fruit,” or we are looking in the wrong places. Or it’s so complex, that scientists are forced to specialize to such a degree as to render their findings realistically irrelevant. I think this is among the simplest explanations for the apparent stagnation in technological progress.
Allow me to pick a bone here though, as I (largely) take issue with the premise to begin with. A company has a fiduciary duty to its shareholders. As the other commentator touches on, there’s pressures on CEO’s and corporations to show results. None of this has changed significantly in recent years, in fact I’d argue pushes towards ESG and ‘stakeholder capitalism’ are now working in the opposite direction of pure shareholder value. I don’t put the blame entirely on companies, because if they legitimately saw value in long term high R&D spending, their shareholders should be convinced to see that, and failing that, they could carry out said duty and stick to their guns. Not an easy thing do, however. Tesla’s shareholders seem to see it, likewise investors saw the value in the tech bubble, EV’s, green energy, crypto, biotech etc (ARKK anyone?). Capital is pouring into smaller, nimbler, forward thinking (perhaps to a fault?) companies, elevating multiples to bubble territory in some cases. The companies are there, the (investment) money is there, where I see the problem is largely either the execution or the feasibility of many of these ideas. Or maybe somewhere else, I won’t pretend to be more than an amateur in anywhere but Economics. That’s not to say that every company is doing it perfectly, but in the long run those that have a vision and an execution will win out. Disclaimer: I’m a finance guy, not an inventor or scientist, and probably quite obviously not a competent rationalist either.
If a company has a secret project which they believe will revoluationize everything in a few years, then it’s worthwhile for them to be not fully open about the fact. Given current regulations they are not allowed to secretly telling their biggest shareholders either because that unfairly gives them benefits that smaller investors don’t get.
An investor has no way to evaluate whether the money that goes into secret R&D is well-spent or isn’t while the CEO has a much better idea of the merits of the secret projects inside the company.