Living for the Next Quarter

Of late, many publicly listed companies have been living “quarter to quarter” or the practice of setting targets, tracking them for progress, and closing out sales and revenue generating items based on the next quarter which is a short term imperative rather than planning for the longer term.

This has led to both good and bad consequences as we would discuss subsequently and before that, it would be in the fitness of things to explain what is meant by living quarter to quarter. To start with, it has almost become the norm in the corporate world around the globe to release results for each quarter which is a standard practice except that the CEOs are also providing revenue and growth guidance for the next quarter rather than the full year.

Of course, in the annual results, they do so for the entire year that is coming up. However, the fact remains that investors, analysts, and even the hitherto serious private equity firms and assorted stakeholders have been focusing on quarterly performance rather than the full year performance.

This has led to a situation where stock prices swing wildly with each quarterly declaration of results which can go either way. While this is a good way to keep the “companies on their toes” as they would be nimble and agile enough to perform, it is also the case that “longer term value” considerations are being lost in the process.

Balancing Shorter Term Stock Prices with Longer Term Value Creation

Indeed, given the fact that equity prices make up just one component of value that corporates build over a longer term, it is our view that while it is good to be the “darlings of the stock markets” for a brief period, it is also the case that corporates must and should not lose sight of the “bigger picture” in the quest for “instant gratification”.

The reason for such quarterly focus has been due to the fact that worldwide the business landscape has become so “fast paced” that investors and analysts likewise are caught up in the “imperatives of the moment” and hence, reward or punish the corporates based on purely shorter term considerations.

The Role of Technological Acceleration

Moreover, with so many technology driven start-ups such as Uber and AirBnB upending traditional taxi and hotel companies mainly due to their agility and nimbleness using technology, it has become necessary for even traditional manufacturing and including service sector corporates to “jump on the shorter term bandwagon” where “survival or success” is purely determined on a quarterly basis.

Moreover, given the imperatives of the “24/7 Breaking News Cycle” media environment, it is often the case that corporates grab the headlines for their profits or losses measured in the shorter term rather than over a longer term.

This creates a “ripple effect” wherein the “electronic herd” takes over and influences investors and shareholders in a “frenzied” bout of selling and buying.

Creative Destruction

As mentioned earlier, this can be good from a “creative destruction” perspective since capitalism and the stock markets are always on the lookout for newer avenues of profits or the “next big thing”.

However, this can also lead to “myopic” outlook from the corporates and their CEOs who obsess over the quarterly results rather than focusing on creating longer term value.

Having said that, it is also not the case that all CEOs or corporates are “taken in” by this frenzy and there remain many “Blue Chip” stocks that perform consistently over the longer term.

For instance, corporates such as Unilever and Proctor and Gamble continue to be respected and much sought after mainly because they can balance the shorter term and the longer term imperatives and drivers of growth.

On the other hand, the worst affected are the technology companies because of the very nature of the industry they operate in. While Unilever and P&G can release new brands every now and then without affecting their revenue streams and profitability, companies such as Apple, Google, Facebook, and Microsoft have to be “hard at the game” to retain market share in much shorter timelines.

Corporate Longevity in an Impulsive Age

As technology accelerates the pace of change and the “Algorithmic” trading systems ensure that the equity markets are run on microsecond and millisecond basis, it is our view that this type of “quarterly impulses” would increase rather than decrease.

Therefore, any corporate that wishes to “stay in the hunt” for a longer term should wisely allocate resources such as capital and human resources in the pursuit of both shorter term targets as well as longer term value creation.

After all, “Rome was not built in a day” and hence, despite all the systems driven changes, old fashioned value creation would continue to be the bedrock by which corporates and their longevity are determined.

Conclusion

Having said that, it is also the case that the rapid turnover of hitherto winners that have now become losers such as Blackberry, Nokia, and Yahoo means that corporates and their CEOs are sometimes left with little choice but to obsess over the shorter term.

Given these imperatives, it is indeed the case that the more astute CEOs would ensure that they keep their jobs with impressive shorter term results and retain the respect of investors by handsomely rewarding them over the longer term.

Moreover, this can also ensure that employees are sufficiently motivated to work harder for the corporates with shorter term “carrots” in the form of stock options being balanced with the “longer term stability” of working for an organization that rewards them for their hard work.