In this article in the WSJ and this article in the New Yorker, the authors discuss the challenges companies encounter when they try to make long-term investment decisions in the face of short-term market pressures: the debate between short-term and long-term thinking on Wall Street “is a key concern for chief executives trying to justify major capital investments that can take years to pay off. Long-range strategies can be hard to pull off in an era when Wall Street is fixated on three-month reporting periods.” Should companies try to please long-term investors or investors who are “playing the quarterly game?” What about hedge-fund activists that threaten to force the company to adopt a short-term perspective?
A McKinsey study cited in the WSJ article found that 75% of shareholders are considered long-term investors. However, 51% of CEOs surveyed said they feel the “most pressure to deliver strong financial performance” within a year, and 36% felt they had a window of one to two years. Only 9% thought they had three years or more to show results. In addition, when comparing actual strategic-planning horizons against their ideal horizons, 44% said that their current horizons were under two years, 41% said they were three to four years and only 11% had actual planning horizons beyond five years. Ideally, however, 37% selected a horizon that was under two years, 37% would like to plan for a three-to-four-year horizon and 23% hoped to plan for periods beyond five years.
In the WSJ article, the author contends that, as reflected in numerous studies, these short-term pressures are a major cause for the decline in the number of public companies—failure of the market to look at the big picture. Some companies have even decided that it was necessary to go private if they wanted to implement significant changes in their businesses.
Another case in point, discussed in the New Yorker, involves Panera Bread. After taking the company public, the founder wanted to transform the chain into a higher end “fast casual chain,” complete with digital ordering, a catering-and-delivery service and a loyalty program—innovations that the article suggests have been widely adopted in the industry but that required significant time and investment before they paid off. However, in the midst of that transformation process, the company faced two attacks from hedge-fund activists, which almost resulted in the founder’s loss of the company:
“Panera was still in the midst of its transformation, and was spending a hundred and fifty million dollars to develop new technology for online and mobile ordering. The efforts hadn’t shown results yet, but the investors wanted him to outsource the project or shut it down. They also wanted him to step down as C.E.O. ‘When you have activists attacking you, the very things you’re sworn to protect—the vision, the organization, other shareholders—your ability to protect them, like your children, are at risk.’”
These are the types of pressures that most public companies—other than, the founder pointed out, those with multi-class share structures—now face. In 2017, the founder took the company private “to protect it from short-term pressures….He believes that the fixation on short-term profits is jeopardizing the future of American business, and creating social instability that has contributed to our current state of political polarization.” The founder believes that “the resentment that these voters feel is a direct result of the quick-profits-over-all ethos that dominates economic thinking. ‘When we live in a world where we view value creation as the end, and not as a by-product, which is what short-term thinking lends itself to, we end up doing great damage to every other constituency, and that’s what ultimately drives back to the kind of ‘let’s rip down the establishment’ nihilism….’”
For another illustration of the larger controversy described in the New Yorker, see this PubCo post regarding the Wausau paper mill. Soon after the Wausau Paper Company was targeted by a hedge fund activist in 2011, Wausau’s paper mill in Brokaw, Wisconsin was shuttered by the embattled company. The mill had been established at the end of the 19thcentury and, since its founding, had provided employment for 450 people and largely built and sustained the surrounding village. The hedge fund activist’s persistent criticism of the company regarding the mill and other assets, especially his disparagement of the CEO’s “troubling” efforts “to prioritize growth” in lieu of returning capital to the stockholders in the form of—surprise—a substantial stock buyback and dividend hike, undermined efforts to rescue and refocus the mill. The closing of the mill in 2012 devastated the residents of Brokaw, as well as the village itself, which is facing dissolution. Wausau represents an example of hedge-fund activists pressuring companies to maximize shareholder returns at the expense of funding R&D, plant, equipment and other internal investments, thus curtailing innovation and long-term value creation to the detriment of shareholders and the U.S. economy.