Sunday, April 04, 2010

The Long and the Short of it!!

Last week during our lunch break at work, we got into a discussion on why company executives are so hung up about short term performances instead of focusing on the long term improvement of the company. We see this everyday. Companies lay off people during bad times and then hire back with a gusto when business is booming, often at multiple times the compensation that was paid to the person who occupied the position before. This is so true in the IT industry in India. My friend, Amit, concluded that all this 'evil' was due to the "short-termism" created by being intently focused on the short-term stock value - the proverbial quarter end numbers. Amit attributes all that is wrong in the corporate system to this short=term view of life and the force that the stock markets exert on individuals as the incentive to outperform earnings is extraordinary.

I thought about this theory while driving back from work. I have a couple of objections to this line of thought (that the stock market is the creator and perpetrator of all evil).

My objection number one is that this cut-throat competition is present in companies that are not listed on the bourses. For example, in India none of the insurance companies are listed although they see cut-throat competition amongst its executives. Hence, the idea that the market is driving them to this level of competitiveness does not wash.

My second objection, or rather observation is that short term behavior is ingrained in us from our childhood. Here are examples where short term results outweigh long-term effort:
  • Exams in schools/colleges - Grades(marks) are all that matter for the future so last minute cramming to get better grades in okay. How many of us really care whether we learn something or not? We are all running after marks because that is only what can be demonstrated.
  • Elections - Again, no one cares for the long term improvement of the country. The incentive being created for the politician is to get and retain power every 4/5/6 years (depending on the country and civic body you get elected to). Long term goals are mostly ignored as real improvement most of the time can only be achieved programs that create short term pain. No one wants to cause that pain hence no real improvement happens. As an example, everyone knows that taxing agricultural income in India should be done as their are millions of extremely rich farmers, but no politician wants to do it because it will ruin his chances of winning the next election.
  • Immediate increase in compensation versus career growth - All managers and business owners are aware of this problem. Employees jump ship for hike in salaries and benefits and join the competition at the drop of a hat. Long gone are the days of employee-employer loyalty. Long-term career growth and development are increasingly taking a back-seat compared to short term jump in salaries.
  • Marriages versus live-ins and casual flings - Statistically, live-ins and casual flings have increased exponentially over the years as opposed to long term relationships (read marriages). Who wants to commit to a long term relationship when a casual fling is so much more hip-n-happening!
I could go on with numerous such examples. The point I am trying to make is viewing life short term or long term is a individual prerogative. Society in general creates incentives for the short term that are clear and visible. And since incentives for the long term and not as clear, it is more difficult for people to trust them. They are like the pot of gold at the end of the rainbow. You never really know if the pot is there.

The stock (or any other market) shows a mirror to your face. It tells you who you are. What your motivations are. It does not create those motivations. If you are a "short-termist" that is what you will see the world as. On the other hand, if you are a believer in the long-term that is what you will find. To each his own. Amen.

No comments: