Senator Schumer’s draft Shareholder Bill of Rights Act of 2009 includes a finding that the “most basic duties” of management and boards require them:
to enact compensation policies that are linked to the long-term profitability of their institutions, … and most importantly, to prioritize the long-term health of their firms and their shareholders….
This focus on the long-term is common and uncontroversial. Even Marty Lipton, who with two co-authors recently wrote a memo that disagrees strenuously with pretty much everything in Senator Schumer’s bill, emphatically agrees with Senator Schumer on the importance of the long-term:
Short-termism is a disease that infects American business and distorts management and boardroom judgment.
Senator Schumer’s bill blames management and boards for this short-termism, while Lipton blames shareholders for it, but each agrees that the short-term is the wrong term.
I don’t agree. Sure, sometimes the short-term is the wrong time-frame, but other times the short-term is exactly the right time-frame. It all depends on the context.
For an investor, a long-term buy-and-hold strategy makes a lot of sense while markets are rising, but it looks a lot less attractive in declining markets. A lot of investors today now wish they’d been infected with a severe case of short-termitis last fall.
Similarly, a company may rationally believe that pursuing a ten year plan will maximize its value, but if someone then comes along and makes a better offer, all of a sudden that same company may rationally prefer a short-term strategy.
So why does long-term get all the glory?
I expect Senator Schumer’s real concern is preventing game-playing in executive compensation, with executives taking bonuses based on short-term results and leaving shareholders with long-term losses. This game can only be played when a company’s compensation incentives do not further its goals. A well-designed compensation system prevents this game-playing by ensuring that management’s incentives are aligned with the company’s goals, whether they be long-term goals or short-term goals (or, at many companies, a combination of both).
And I expect Lipton’s real concern is to protect managers from shareholders. Lipton generalizes that shareholders are short-term in their outlook and that management is long-term (their jobs need preserving, after all), so his demonization of the short-term is neither surprising nor, unless you are a manager in need of Lipton’s entrenchment services, persuasive.