When People Have More Dollars Than Sense: The Perils of Short-Termism in Business

Introduction

In my new residential development, I observed a gentleman diligently maintaining my neighbour's lawn and trimming trees at another nearby property. Being the third tenant in this newly established community, I decided to inquire about his rates and services. He informed me that he would provide twice-monthly lawn care for a total fee of $400. However, he also mentioned an initial "cut-as-you-go" fee of $200 for the first session. Given the circumstances, I agreed to these terms, anticipating regular and professional maintenance.

After three months of service, I began to notice a concerning pattern. The landscaper was cutting dirt, as my property had a very minimal lawn and no hedges or trees that would justify the $400 monthly cost. This realisation prompted me to reconsider the value of his service.

Reflecting on the situation, I proposed a change in the arrangement. I intended to ask him to reduce the service frequency to once a month. However, before I could fully explain my reasoning, he interrupted me. He insisted that reducing the frequency to once a month would result in the grass growing too long and refused to accept $200 for a single monthly cut. His abruptness and unwillingness to listen prevented me from sharing my full plan.

Had he allowed me to speak, he would have learned that I was willing to pay $300 for one monthly cut. Furthermore, I was prepared to discuss a longer-term vision for my property, including planting hedges and trees. Such an arrangement would have justified two monthly cuts and sustained his business.

Unfortunately, his lack of patience and foresight resulted in the loss of a potential long-term customer. I could have contributed $4,800 annually to his business, not to mention additional revenue through recommendations to other residents in the community. His inability to recognise and seize the long-term benefits of nurturing customer relationships epitomised a case of having "more dollars than sense." This shortsightedness ultimately cost him both immediate and future business opportunities.

In the fast-paced, competitive business world, it is not uncommon to encounter individuals and organisations prioritising short-term gains over long-term sustainability and growth. In this article, we will explore the perils of short-termism, examine real-life examples of businesses that failed due to this mentality, and discuss strategies for cultivating a long-term perspective that fosters sustainable success.

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The Nature of Short-Termism

Short-termism, as defined by Jackson and Petraki (2011), involves situations where corporate stakeholders prefer strategies that yield earlier payoffs, even if they add less value compared to strategies with later payoffs that would add more value. This phenomenon has been widely criticised by experts, who argue that it redistributes wealth instead of creating it, thereby diverting resources from economic growth (Gross & Lewis, 2007). Furthermore, Lin-Hi and Blumberg (2012) contend that corporate short-termism leads to worse eventual outcomes for businesses.

The prevalence of short-termism in the business world can be attributed to various factors, including the pressure to meet quarterly earnings targets, the influence of activist investors, and the misalignment of incentives between managers and shareholders (Rappaport, 2005). Additionally, the increasing speed and accessibility of information in today's digital age may pressure executives to think and act with a short-term bias (Kueppers, Sandford, & Thompson, 2009).

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The Landscaper Anecdote: A Prime Example

To illustrate the pitfalls of short-term thinking, let us consider the anecdote of the landscaper mentioned in the introduction. The landscaper's unwillingness to listen to the client's needs and adapt his services accordingly cost him a potentially lucrative, long-term customer. Had he taken a more holistic approach and nurtured the relationship with the new neighbour, he could have expanded his business through recommendations and secured a stable income stream.

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This example highlights the importance of building and maintaining strong customer relationships, an essential aspect of long-term business success. As Mei-Liang and Kuang-Jung (2010) point out, there is a symbiotic relationship between customer service and product quality over the long term. By treating customers as inherently meaningful rather than merely helpful in completing a current transaction, organisations can develop both the trust that encourages customers to speak up about desired product improvements and the patience to wait for the organisation to provide those improvements.

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Real-Life Examples of Businesses That Failed Due to Short-Term Thinking

1. Tesco: British retail giant Tesco incorrectly expedited revenue recognition and deferred costs to meet short-term profit goals. This focus on short-term results misled stakeholders and caused a disastrous hit to Tesco's reputation and market share (Ahmed, 2014).

2. Groupon: Shortly after Groupon's IPO, material internal and financial governance weaknesses were revealed. Although not required, Groupon failed to certify internal controls before going public, which was ethically questionable. The absence of transparency caused a significant decline in share price, resulting in major losses for many investors (McKenna, 2012).

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3. Olympus: Over a decade, Olympus Corporation falsified investments and overstated revenues to hide losses. These fraudulent accounting practices to meet short-term goals resulted in lawsuits, convictions, and hefty fines (Achieveit, 2021).

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4. Kodak: Even though Kodak developed the world's first digital camera, management was so focused on the success of photography film that they missed the digital revolution. They failed to keep innovating and filed for bankruptcy in 2012 (Anthony, 2016).

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5. Hostess: Twinkie sales dwindled due to a "healthier" snack craze. Yet Hostess continued churning out highly processed foods without adapting to taste trends. Their failure to innovate and rebrand caused them to file for bankruptcy in 2012 (Achieveit, 2021).

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Nurturing Sustainable Business Relationships

Successful businesses recognise the importance of developing and maintaining strong, long-lasting relationships with their customers. As Davis (2005) points out, companies with a long-term value orientation not only set and deliver on short-term performance commitments but also define what they are doing to ensure their health and measure their efforts to do so. This requires a shift in mindset from a narrow focus on immediate profits to a more comprehensive approach that considers the long-term benefits of building trust, understanding customer needs, and fostering loyalty.

Moreover, the benefits of nurturing long-term relationships extend beyond customers to include suppliers, employees, and other stakeholders. Lopez-Navarro et al. (2011) emphasise the crucial role of trust and sacrifice in obtaining the mutual benefits that allow supplier relationships to endure. Similarly, investing in employee training and development can lead to significant downstream benefits for both personal growth and organisational performance (Lees & Malone, 2011).

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Strategies for Long-Term Success

1. Embrace Adaptability: Businesses should be willing to adjust their services and pricing to accommodate the unique needs of their customers. By demonstrating flexibility and a willingness to collaborate, they can establish lasting partnerships that benefit both parties (Caleb, 2023)

2. Prioritise Customer Relationships: Investing time and effort into understanding your customers' goals, challenges, and preferences can help you tailor your offerings and provide exceptional service. This, in turn, can lead to repeat business, referrals, and sustainable growth (Mei-Liang & Kuang-Jung, 2010).

3. Cultivate a Long-Term Mindset: Resist the temptation of short-term gains and instead focus on building a solid foundation for your business. This may involve sacrificing immediate profits in favor of nurturing relationships, investing in employee development, or exploring new avenues for growth (Lees & Malone, 2011).

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4. Encourage Self-Reflection: Regularly assess your business practices, decision-making processes, and customer interactions. Embrace self-reflection and be open to feedback, as this can help you identify areas for improvement and opportunities for growth.

5. Develop a Multi-Temporal Strategy: Recognise the importance of balancing short-term challenges with long-term needs. Adopt behaviours such as time-layered projects, product portfolios, competency focus, continual resource building, flat organisational structure, and consistent ownership to facilitate the ability to give sufficient attention to both long and short term concerns (Le Breton-Miller & Miller, 2011).

6. Align Managerial Incentives with Long-Term Performance: Ensure that executive compensation and incentive structures are tied to multi-year performance rather than solely focusing on short-term metrics (Gray & Cannella, 1997). This can help discourage managers from engaging in short-term behaviors that may harm the company's long-term prospects.

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The Role of Investors in Promoting Long-Termism

While much of the responsibility for combating short-termism lies with corporate managers, investors also play a crucial role in shaping the temporal orientation of businesses. Neubaum and Zahra (2006) found that firms with higher percentages of ownership by dedicated institutional investors tend to exhibit longer-term managerial thinking, including greater attention to corporate social performance. Conversely, a higher ownership rate by more transient investors has been found to reinforce a short-term focus (Connelly et al., 2010).

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To promote long-termism, experts have called for increased transparency in explaining how executives are paid (Curran & Chapple, 2011; Rappaport, 2005) and greater alignment between compensation and long-term performance (Gross & Lewis, 2007; Krehmeyer & Orsagh, 2006). Additionally, institutional asset managers can become more active in monitoring executive compensation (Krehmeyer & Orsagh, 2006) and have a more significant presence on boards (Porter, 1992) to ensure that the long-term interests of the corporate entity are prioritised.

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The Societal Impact of Short-Termism

The consequences of short-termism extend far beyond individual businesses and their stakeholders. As Curran and Chapple (2011) point out, short-term-oriented investors who are skilled (or lucky) in their timing can generate benefits for themselves at the expense of long-term damage to the companies in which they invest or the overall system. This can lead to a redistribution of wealth that exacerbates income inequality and hinders economic growth.

Moreover, short-termism can have detrimental effects on social and environmental sustainability. Millon (2013) argues that the genuine need for short-term stewardship can distract from long-term vision, making it more difficult for businesses to embed sustainability into their operations. Like research and development, corporate social responsibility requires current expenditures that reduce earnings, making it an easy target for cost-cutting when firms face quarterly earnings pressure.

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Conclusion

The examples discussed throughout this article demonstrate how an excessive focus on short-term results at the expense of long-term interests can lead to unethical behaviour, loss of market share, and even bankruptcy. Businesses must balance short-term goals with long-term sustainability to avoid becoming the next cautionary tale. By adopting a more holistic and stakeholder-centric approach, companies can avoid the pitfalls of "having more dollars than sense" and instead cultivate sustainable success through solid relationships, a commitment to long-term value creation, and a recognition of their broader societal impact.

Ultimately, combating short-termism requires a concerted effort from all stakeholders, including managers, investors, and policymakers. By aligning incentives, increasing transparency, and prioritising the long-term health of organisations and the systems in which they operate, we can work towards a future where businesses are built to last, creating value for generations to come.

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References

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