Short Take – Where companies with a long-term view outperform their peers

McKinsey has a new report out that provides systematic evidence that a long-term approach can lead to superior performance for revenue and earnings, investment, market capitalization, and job creation. They have created a systematic measurement of long- and short-termism at the company level called the ‘Corporate Horizon Index’ which they use to measure company’s behavior along 6 different dimensions and then correlate the measure with company performance metrics such as revenue and margin growth, employment, response to business cycle downturns, etc. It looks to be a robust and well thought-out framework for assessing the relative effects of ‘short-termism’ and ‘long-termism’ corporate behavior. Some of the findings.

  • Short-Termism is increasing – Idea-intensive industries such as software and biotechnology are among the most long-term, while capital-intensive industries such as automobiles and chemicals are among the most short-term.
  • Long-term firms exhibit stronger fundamentals – The long-term companies had higher revenue growth, less volatile revenue growth, higher earnings growth, rebound more quickly after a recession, and higher levels of ‘economic profit’ (a measure of a company’s profitability as well as how effective it is at using its capital to grow the business by allocating to the best available opportunities relative to other options).
  • Long-term companies deliver superior financial performance – higher market capitalization and greater total returns to shareholders. If all other firms had appreciated at the same rate as long-term firms, US public equity markets could have added more than $1 trillion in incremental asset value from 2001 to 2014,
  • Long-term companies continue to invest in difficult times – long-term companies invested significantly more in R&D on average than other companies over 14 years, amounting to almost 50 percent greater average annual R&D spending by 2014. They invested in future growth when others failed to do so, and they were rewarded for it
  • Long-term companies add more to economic output and growth – Between 2001 and 2015, long-term companies added more jobs to the economy than other firms, US companies would have added roughly eight million more jobs from 2001 to 2015 if the entire market were long term.

What this report does not do is to analyze the causal factors why this is so. While it may seem obvious to many, it certainly isn’t to Wall Street or to the many companies whose activities are contributing to the increase of short-termism.

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