Evangelisches Heidehof-Gymnasium Stuttgart
Finalist for the region South-East
ECOSTAINABLE: Sustainable, Successful Corporate Management
Problem Identification
Corporations are reliant on their investors. Since the investors prefer high, short-term profits, corporations set short-term goals and try to achieve the best possible quarterly reports to satisfy the capital market and attract new investors. Additionally, many corporations have implemented bonuses for managers based on quarterly reports and short-term profit, incentivizing myopic management internally. Due to this, long-term goals and investments may often be neglected, disregarding potential future profits, which may outperform the short-term profits.
Possible Solutions
Long-term management has historically raised more profit as opposed to short-term management after a year of following the strategy. For an effective long-term management strategy, quarterly reports should not be the goal itself but rather support long-term goals and deliver insights to the current situation of the corporation. Short-term measures should not be used to compensate for long-term issues, they should be solved head-on. Finally, information asymmetry between the capital market and the corporation should be avoided through increased transparency.
Solution 1 – The Seemann Index (SMI):
The Seemann Index is an index created by our student Paul Seemann to quickly evaluate the long-term position of corporations. The value increases when future investments are high, and artificial cost compensation (for example through employee release shortly before quarterly reports) is low.
The Index allows insight into the orientation of a corporation and shows if the focus is on short- or long-term goals.
Solution 2 – sustainable quarterly reports:
Since quarterly reports are based purely on financial numbers, introducing a sustainable value could increase transparency and an understanding for long-term goals. This sustainable value would be a composite value made up of KPIs (Key Performance Indicators) of the three corporate social responsibility sectors (ecological, economic, and social).
Solution 3 – Employee Satisfaction:
Employees in long-term oriented corporations are generally happier. This in return leads to increased innovation and productivity. Reporting employee satisfaction and turnover would allow further insights into a corporation and incentivize long-term decisions by management.
Call-To-Action
Our call-to-action measures are the three options which should be followed as a first step to counteract myopic management and encourage sustainable and long-term goals in corporations.
1. Management Bonuses: A structural change of bonuses to be based on sustainable economic, ecological, and social management would incentivize long-term management internally.
2. Sustainable Values in quarterly Reports: Adding a sustainable value or multiple sustainable values based on ecological, economic, and social to the quarterly reports would increase transparency and understanding with the capital market regarding long-term management.
3. Seeman Index (SMI): The Seeman Index reflects the long-term orientation and security of a corporation in one value, allowing a quick overview for investors and management.
Their YES! topic
Myopic management: Why is corporate management obsessed with quarterly earnings and what should be done about it?
by Simone Wies (SAFE)
Myopic management describes managers’ tendency to obtain short-term gains at the expense of potentially larger long-term profits. Myopic management is particularly present in public firms, which have to meet investors’ quarterly earnings expectations. As a result, practitioners often complain that being a publicly listed firm reduces managerial discretion to invest on long-term projects such as innovation.
Ingvar Kamprad, founder of Ikea, for instance, notes that “keeping companies like Ikea in private hands would secure the freedom to have a long-term view on investments and in business development” (Kamprad 2011). Likewise, the computer manufacturer Dell announced to take the company private in 2014 to “make decisions that aren’t just based on profits and revenues in the next quarter, but with a longer-term focus” (Devaney 2013, p.8).
Echoing this sentiment, business periodicals point out that companies should try to avoid “Wall Street’s obsession with quarterly earnings expectations” (Forbes 2003, p.174). Tellis (2013, p. 239) refers to the negative effects of the stock market on managerial decisions as the “Wall Street curse” and specifies that “pressure from investors on Wall Street causes managers to cut investments in innovation to boost current earnings and stock prices, at the cost of future innovation, growth, and long-term market cap.”
Academic literature also points to the threats of myopic management and the potentially devastating consequences for firm behavior (see for instance Graham et al. 2005; Mizik 2010; Chakravarty and Grewal 2011). Hence, a key question of interest for managers, investors, and policy makers alike is: How to curb the obsession with quarterly earnings and avoid myopic management?
Simone Wies
Simone Wies holds the professorship of Marketing Strategy & Performance at Goethe University Frankfurt. Previously, she was a Junior Professor of Marketing and Finance at the Leibniz Institute for Financial Research SAFE at Goethe University and a Post-Doctoral Researcher at the Fuqua School of Business, Duke University. She received her M.Sc. in Marketing and Finance and her Ph.D. in Finance from Maastricht University. In her research, Simone Wies focuses on the interactions between financing strategies and marketing decisions of firms, with a particular focus on innovation strategies. She studies, for example, how capital markets evaluate marketing decisions and innovation projects, and how these evaluations in turn influence the strategic decisions that managers make. In addition to her research, she teaches in the Marketing Analytics M.Sc. programme, is Director of the Marketing Specialisation in the B.Sc. programme and Director of the Marketing Ph.D. track of the Graduate School of Economics, Finance, and Management.
