The Long Term Costs of Short Term Thinking

By Ali-Asghar Abedi,  class of 2021

By Ali-Asghar Abedi, class of 2021

Few predicted the election of Donald Trump as President of the United States. However, despite his lack of political credentials, he has demonstrated a talent for understanding what motivates the average American voter. Americans appear to be anxious about their future which, I will argue, may be explained by the short-term thinking that pervades American boardrooms.

Firstly, consider paid time off. Most Americans passively accept two weeks off per year and many do not use their full vacation allowance. Although this policy solves employers’ immediate staffing needs, a lack of vacation leads to greater incidences of depression and heart disease. Additionally, such miserly vacation policies make travel more difficult.

Nineteenth century German philosopher Alexander van Humboldt contended that the most dangerous world views are of those who have not viewed the world; a maxim that can be applied to this discussion. Restrictive time-off policies can undermine intellectual development which may make people more susceptible to dogma and likely to view foreign people and concepts with disdain or even as a threat.  Conversely, more generous time-off policies can help employees pursue travel and other intellectually stimulating endeavors that broaden perspectives, increase tolerance for ambiguity and cultivate more robust worldviews. This in turn better equips employees to build coalitions and solve complex problems. In addition, rested employees are likely to be more productive on the job.

Secondly, management teams across the country are highly under pressure (often from hedge funds and mutual funds favoring shorter term returns) to impress Wall Street by beating quarterly EPS estimates. Such quarterly capitalism has seen CEOs and CFOs offer increasingly higher dividends and stock buybacks. For example, over the past three years The Gap has counter-intuitively increased dividends successive years of declining net income. Every dollar spent on returning cash to shareholders is a dollar that cannot be spent on investing longer-term growth via capex, R&D, eco-initiatives or human capital development. Attracting investors seeking longer-term returns may help avoid the pitfalls of quarterly capitalism. For example, management at Sky plc (Europe’s leading pay TV provider) attributes much of the firm’s success to 21st Century Fox’s large controlling stake which allows the C-suite to play the long game.

Today’s rapid pace of change compounds the impact of short-term thinking. Think of the household names that didn’t exist twelve years ago: Facebook, Twitter, YouTube, Uber, Snapchat, Airbnb and Whatsapp. The emergence of these firms and the coming third internet wave (pertaining to IoT) has eliminated the need for many of yesterday’s jobs. Moreover, according to the World Economic Forum, 65% of the jobs that today’s primary school children will end up holding do not exist today. In such a time, there is an urgent need to invest in employee education and training.  

This lack of training is a particularly acute development given the prospect of automation. Faced with minimum wage pressure, restaurants are motivated to reduce reliance on human capital. Why pay someone $15 per hour when an iPad can take an order and a robot can make a pizza? Furthermore, complex tasks and functions no longer require human input. Today, robot lawyers are helping people get out of parking tickets and claim airline compensation; investment banks are hiring math PhDs to their trading desks to write complex algorithms and the world is moving towards driverless cars and robot pilots.

More than trade deals, automation and a lack of training threatens the future livelihood of many American workers

More than trade deals, automation and a lack of training threatens the future livelihood of many American workers

Overcoming short-term thinking does not necessarily require legislative or regulatory solutions and may instead be achieved with a change in management incentives (e.g. compensation structure). In additionally, assembling a diverse Board of Directors could help prevent management teams from operating in an echo chamber and highlight the long-term consequences of decisions.

Considering the long-term is particularly warranted because short-term thinking has left many Americans short-changed. When the overwhelming majority of economic gains since 2008 go to the top 1%, it's not unreasonable to conclude that the American Dream is in peril. Driven by anxiety, voters affected by short-term corporate thinking opened Pandora’s Box. The result can be seen in the country’s choice for 45th President.

Al is a first year MBA student who is trying to balance business interests with social impact