Short-term investment undermines sustainable growth – by Dominic Barton (Globe and Mail – May 7, 2015)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

In a world that desperately needs long-term investment, we face a daunting shortfall. Global long-term investment collapsed during the Great Recession of 2008 and has not recovered since. Across advanced economies, real private business investment fell by 10 to 25 per cent from 2007 highs, and recovery has been slow.

Business investment is a key determinant of long-term growth, and essential for creating jobs. The world is facing a vast unmet infrastructure challenge: Investments of nearly $60-trillion (U.S.) are needed in roads, rail networks, airports, sea ports, water and telecommunications by 2030. Moreover, in industries with the biggest need for innovation, such as health care, research and development spending is declining.

In this context, long-term investment is needed now. Yet short-termism is actually on the rise.

Indeed, it has become the norm in our capital markets. Almost all public companies dedicate significant resources to meeting quarterly earnings guidance, and assess their performance relative to it. Since more than 50 per cent of a typical company’s value comes from activities that will take place three or more years in the future, businesses are clearly failing to make profitable investments as a result.

Seventy-eight per cent of executives surveyed in a Financial Analysts Journal study reported that they would take steps to improve quarterly earnings at the expense of long-term value creation.

Many institutional investors, in turn, have a narrow focus on performance. They use short-term incentive strategies to reward fund managers and are hypersensitive to the news cycle.

In an effort to appease short-term investors, many companies are resorting to share buybacks rather than long-term investments. In some cases, this may be a rational attempt to return cash to shareholders by managers unable to find profitable investments. Yet, the sheer scale suggests that many companies are shortchanging “essential capital expenditures necessary to sustain long-term growth,” as BlackRock CEO Larry Fink noted in a recent letter to S&P 500 executives.

Companies that unduly prioritize share buybacks are failing to invest adequately in their work forces, in their research capabilities, in innovation and in the infrastructure required for sustainable long-term growth. But as CEO tenure continues to shrink, many executives will be gone before the impact is felt.

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