Advice from the ants about grasshopper companies
A major business group calls for executives to practice more patience toward a company’s long-term value and ignore ‘quarterly capitalism.’
Famous investor Warren Buffett (l) and JP Morgan Chase Chairman and CEO Jamie Dimon are encouraging public companies to stop predicting their quarterly earnings and focus on long-term goals, part of a broader plea from the Business Roundtable.
AP Photo
In a June 7 statement, nearly 200 chief executives of major American firms put out a special plea through a group called the Business Roundtable. In essence, these titans of industry and finance gave their support to companies that are patient in growing their underlying value rather than continually panicked about producing quick results.
Specifically, they suggested executives not provide stock analysts with “guidance” every three months about expectations for the company’s earnings and instead think more about the families and others who invest for retirement and expect profits over decades.
“Public companies should be managed for long-term prosperity, not to meet the latest forecast,” the statement said. “Such short-termism is unhealthy for America’s public companies and financial markets – which are critical to economic growth and financial prosperity.”
One “unhealthy” aspect of so-called quarterly capitalism is that executives sometimes distort or even lie about their company’s activities. They neglect investments in research or employee training. They don’t take the time to recruit top talent or create a consensus among all stakeholders about long-term goals.
The practice of offering earnings guidance really took off two decades ago. But as its downsides have become better known through studies, more companies have moved away from it. Jamie Dimon, chief executive officer of JPMorgan Chase, says only about 20 percent of Business Roundtable members still do quarterly guidance while about 60 percent now provide annual targets. The rest do something in-between.
A recent study of about 600 firms by the McKinsey Global Institute found that 73 percent of public companies are short-termist. Firms that are long-termist saw profits that were 36 percent higher between 2001 and 2014.
Investors are often told to be patient about a company’s stock, focusing more on fundamentals like innovative research than a stock’s volatility or temporary disruptions in a market. Now that virtue is being touted by America’s business elite. “Patient capitalism” is difficult to measure or put in a financial report. Yet here’s a tip from some of the most successful companies: It works.