We are often told to think long term, keep the big picture in mind, or that it’s a marathon, not a sprint; however, evidence shows it’s not always in human nature for individuals to behave in a long-term manner. Public companies are no different, and in recent years, the debate has centered on the detrimental impact of the short-term mindset of many public companies. Short-termism (a.k.a. quarterly capitalism) is defined as companies’ fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the cost of long-term investment. Short-termism is viewed as a problem because it has the potential to undermine future economic growth with the lack of long-term investment, ultimately leading to slowing GDP, higher unemployment levels, and lower future investment returns for savers—implications that could hurt everyone.
This paper will analyze the short-termism versus long-termism debate, examine how institutional investors are proposing to alleviate short-term thinking, and explore how incorporating long-term metrics is a critical step in this transition to long-termism.