How Focus on Quarterly Earnings is corrupting Companies

The Number

Whether you are an investor, a student, or anybody who pays attention to company reports and the corporate world, you would in all probability be watching what has now come to be known as “The Number”. This term denotes the Quarterly Earnings that are released by all companies and which forms the basis for stock price movement, dividends, and a whole host of related measures. Companies live and die with this number and fortunes are made and lost on Wall Street and Dalal Street because of this number. However, the obsessive focus on quarterly earnings as the be all and end all of companies’ existence is corrupting CEO’s and making them short-term oriented.

In other words, CEO’s are no longer judged based on their long-term vision and deep strategies by merely by how well they do from quarter to quarter.

Further, with stock prices determining everything from valuations to IPO targets, the excessive focus on quarterly earnings is destroying the principles of corporate governance.

Enron, WorldCom, and Apple: A Study in Contrast

The difference between the three companies listed above is that whereas the first two companies focused too much on how to beat the market expectations and lived from quarter to quarter, Apple took the time and invested effort in having a deep and broad product line, which is now paying handsome rewards for the company.

The point here is that whereas Enron and WorldCom resorted to dubious accounting practices, which ultimately led to their downfall, Apple focused on building its organization and designing great products that took time to materialize but is now propelling the company to greater heights. Similarly, there are a host of companies where the CEO’s were fired because of poor annual or quarterly earnings or there was a shakeup in the management structure because of this aspect.

Change is Glacial

Business Leaders must understand that organizational change and leadership development takes time and hence, they should make it a point not to judge employees based on a single or two or three quarters alone. This is not to say that one can take it easy under the cloak of longer term planning, Rather, the point here is that the fruits of labor take time to manifest and ripen and hence, CEO’s as well as senior management figures ought to be given time for their strategies to actualize. With so much of focus on the short term and the compulsive obsession with the instantaneous results and quick fixes, companies are missing adding and creating value over the longer term. Indeed, the situation has deteriorated to such an extent that many companies have lost touch with reality and are behaving like junkies in search of the next high.

Closing Thoughts

It is clear from the discussion above that while short term results are important, business leaders must be allowed greater latitude and more room for their strategies to bear results. Too much focus on short-termism leads to unethical practices and corruption of corporate governance structures. Ultimately, neither companies nor investors gain from this attitude.

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