Assessing short- and long-term performance

Short-termism is when the actions of managers show an action obsession with immediate  issues rather than long term ones. Often such managers will use lots of long-term words such as mission, aims, strategy amd legacy; but staff will soon learn when the real spur to action is this year or this month's budget. Possible symptoms of short-termism:

• inadequete expenditure on R&D
• accounting adjustments that inflate current earnings 
• a bias towards high dividend payouts and share achievement of short-term financial goals
• overly zealous cuts in employment leves, which destroy the company's stock of human capital
• a disregard for longer term risks in the company's product, services or business strategy
• an excessive focus on acquisitions rather than organic growth.

The causes of short-termism 

The most commonly cited explanation os short-termism by UK companies is the relationship with financial markets; many people believe that the plc structure encourages short-termism. The reason for the pressures is that city investors are more important today than private shareholders, and the city investors are measured on a quartly basis. So if city investors are measured every three months, no wonder they're more interested in the short-term performance of the company. 

Other important causes of short-termism:

• The widespread use in the city of short-term focused performance measures such as earnings per share as a way of judging the bonus level to be paid to the directors; EPS can be boosted by the ultiate short-termism meausre: buying shares back from shareholders; this boosts a company's gearing yet creates a higher share price and therefore bonus level. 
• The threat of a takeover.
• The bosses of UK firms are unusually likely to have had a career based in finance; therefore they have no inherent understanding of the long term thinking that is more instinctive among engineers, scientists and marketing executives. 

The effects of short-termism 

• The most important effect of short-termism is underestimating or ignoring the opportunities that may exist in the long-term.
• Reluctance to invest in cpacity, training, R&D and perhaps also in image-building advertising.
• Decisions that seem wise in the short-term, but not down the line.
• Performance reward systems may over-focus on short-term gains, encouraging staff to achieve profit today even is it's at the expense of tomorrow. 

Germany has a business sector dominated by world-class, medium-sized by family owned and run businesses - the Mittelstand. In the UK the business pages in the news are dominated by the latest results from plc, in Germany there is more likely to be reporting on business issues and market opportunities.

Mittelstand is more focused on the long term rather than the short term like UK businesses. 

Core competencies are at the heart of a long-termist approach to business.