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.
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.
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.