The recent weeks and months have seen a lot of cost-cutting at marquee companies. Both the fact of the cutting as well as the manner of implementation have led to concerns about the long-term impact it may have on these companies. While the manner of implementation speaks to the quality of leadership at the companies (not nearly as good as the reputation!), the fact of the cutting is more about short- vs. long-term outlook.
Public companies who focus on a long-term outlook may experience Wall Street pressure, unless they are profitable enough to appease shareholders. Even then, if/when that profitability starts to slip their focus tends to turn to a more short-term outlook.
Private companies have more flexibility than public firms chained to quarterly reports. However, private VC-backed companies may face equally short-term demands.
In general, private ownership enables taking the long view more easily while public markets are focused on short-term metrics. Short-termism has become prevalent overall in recent decades.
- The primary advantage of a short-term focus, and the reason why so many companies are following that approach now, is that it maximizes immediate returns to shareholders and investors. This can be needed for meeting quarterly earnings expectations and attracting investors.
- Short-term strategies usually yield immediate results and quick performance gains, such as boosting the current cash flow.
- Companies have flexibility to quickly adjust strategies and resource allocations based on short-term trends and opportunities.
- A short-term focus, with its associated close scrutiny, encourages effective execution. Companies with a long-term outlook may execute poorly, never really produce results, and suffer from a lack of accountability.
- A short-term focus will lead to an erosion of capabilities and expertise. Prioritizing immediate gains over sustainable growth can lead to a vicious cycle of constantly falling short of estimates.
- Decisions made to support a short-term focus may do significant long-term harm to the company. Continual rounds of layoffs will erase employee trust and loyalty. Not investing in R&D will lead to lack of competitive products.
- A short-term focus can discourage investments in risky but potentially high-reward initiatives.
- By far, the primary reason for going public is access to funds. Public companies can tap into financial markets for capital by selling stock (equity) or bonds (debt). Private companies cannot raise funds by selling shares to the public.
- The increased visibility of being public can also improve a company’s status. Being publicly traded usually enhances a company’s reputation and visibility.
- Public companies are subject to extensive regulatory requirements, including the need to disclose business and financial activities. Private companies are not required to disclose information to the public, allowing them to operate with more discretion.
- Publicly traded companies face intense scrutiny from investors and analysts, usually prioritizing short-term financial performance. Private companies can prioritize investments in areas like research and development, aiming for sustainable growth and future profitability.
- Shareholder pressure and short-term market fluctuations can influence strategic decisions, potentially hindering long-term plans. Private companies have more freedom to pursue long-term goals without immediate pressure from external stakeholders.
