Definition of short-termism
Short-termism refers to an excessive focus on short-term results at the expense of long-term interests.
A report from the Business Roundtable Institute for Corporate Ethics and the CFA Institute - Breaking the Short-term Cycle - notes that an excessive short-term focus by some corporate leaders, investors, and analysts combined with insufficient regard for long-term strategy can tip the balance in value-destructive ways for market participants, undermine the market’s credibility, and discourage long-term value creation and investment.
Some analysis of the global economic downturn points to short-termism of financial institutions and lenders as a root cause.
Such short-term strategies are often based on accounting-driven metrics and profit maximisation that fail to fully reflect not only the complexities of corporate management and investment, but also the significant opportunities and risks associated with these strategies.
The most prevalent accounting-driven metric is the earnings per share (EPS). Research by scholars John Graham, Campbell Harvey and Shivaram Rajgopal has shown that managers are making real decisions - such as decreasing spending on research and development, maintenance and hiring of critical employees - in order to hit quarterly earnings targets they have provided as part of their own guidance.