Short termism still dominates shareholder and investor behaviour

short termism is rational when there's no light at the end of the tunnelThose who follow my blogs will know that I have criticised investors and shareholders for the short termism that has dominated their behaviour and thinking for many years.

It is a mindset that was highlighted in 2015 by Bank of England economists Andrew Haldane and Richard Davies, who argued that corporate and investor impatience was on the increase. Little has changed since then.

The emphasis has been on maximum return for investors’ money as soon as possible, and has also dictated high levels of CEO remuneration, but, as I have previously argued, these are not helpful for businesses that want to be around in the medium and longer term, after non-shareholding executives have moved on.

This particularly affects businesses’ ability to invest in R & D and in planning for growth and forces them to focus on immediate profits to pay dividends, which may not necessarily be in the best interests of their sustainability in the future.

As Haldane said in a BBC interview “companies risk “eating themselves” as shareholders and management were gripped by a form of short-termism.

Is short termism a reasonable position because of Brexit uncertainty?

Since the UK decision in 2016 to leave the EU, the ongoing Brexit negotiations have added an extra layer of uncertainty to business forward planning.

According to the CBI, in the year or so since the Brexit decision, businesses have been seen higher import costs, falling financial markets, weakening consumer spending and ongoing uncertainty. Its January 2018 economic review reported: “This is clearly hitting plans for capital spending in the year ahead, with around 40 per cent of businesses citing a negative impact from Brexit on their investment plans.”

In December last year the Daily Mail’s online publication This is Money, also told a similar story: “Investors have pulled nearly £4.3 billion from UK funds over the past 18 months.”

Immediately after last year’s election, the IoD (Institute of Directors) also reported a 34% reduction in confidence in the economy among its members.

“It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders, and the consequences could – if not addressed immediately – be disastrous for the UK economy,” said Stephen Martin, director general of the IoD said at the time.

In the face of rising political volatility and uncertainty about growth, both globally and nationally, it is difficult for institutional investors to know what to do for the best.

It pains me to say it, but in the light of all this, short termism among shareholders and investors may be a rational strategy, despite the longer-term consequences for businesses. At least until we can see light at the end of the tunnel.

One Response to “Short termism still dominates shareholder and investor behaviour”

  1. Tony Armitage

    I think this short termism is little to do with Brexit and more to do with corporate evolution and risk taking.

    Shareholder expectations versus cash flow management are akin to a tug of war from either side of a river. Strength with always prevail over wisdom.

    Reply

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