We know there’s a chronic mismatch between long-term investors like pension funds and, well, pretty much anyone else, including investment managers and corporations. And we know instinctively that short-term thinking can lead to long-term problems. But hard numbers have been missing from the conversation. Does short-termism really add up to poor performance on the bottom line?
Yes, apparently. New data shows that corporate short-termism does indeed hamper profitability, and significantly so.
McKinsey just announced the formation of a Corporate Horizon Index, which parses data from 615 large and mid-cap U.S. publicly listed companies from 2001 to 2015. It looks at patterns of investment, growth, earnings quality, and earnings management. Companies classified as long-term were found to outperform their short-term peers on a whole range of metrics, both economic and financial.
So, to what extent are companies with a long-term vision leaving their short-term focused counterparts in the dust?
Consider this:
° Between 2001 and 2014, revenues from so-called long-term firms grew 47% more than those of other firms – with less volatility.
° Long-term firms showed cumulative earnings that were 36% higher than other firms – and economic profits that grew 81% more on average.
° Long-term firms spent 50% more on research and development – even during the Financial Crisis, when they in fact increased spending in this area.
° Long-term firms added nearly 12,000 jobs on average that others from 2001 to 2015. If all firms had created as many jobs as long-term ones, the U.S. economy would have added more than five million additional jobs during the same period.
This kind of data is fundamentally important for pension funds (and policymakers) as they strengthen their own case for a long-term vision in a world that seems frustratingly focused on the short-term.
Big question: can this index be made investable – and will others follow suit?
Download the full report here.