SUMMARY: Free-market capitalism is in trouble. The focus on “profits now” is leading to a mentality of short-term business practices that are harming our health and well-being for the sake of quick payouts.
According to The Times “, the evidence of a growing short-term orientation among American public companies isn’t hard to find. Boeing’s corner-cutting on the Max 737, Wells Fargo’s fraudulent customer accounts and Johnson & Johnson’s opioid scandal are all examples of short-term behavior with disastrous long-term consequences.
In 1950, a typical share of stock in United States public markets was held for eight years. Since 2006, the average share of stock has been held for less than a year.
A 2006 study conducted by economists at Duke University found that 78 percent of executives at public companies said that they would sacrifice long-term economic value for a short-term lift in share price.
The Times goes on to say “in 2018, the median tenure for chief executives fell to a historic low of five years. Wall Street analysts dissect corporate quarterly earnings scorecards like never before, leading executives to focus more of their efforts on hitting near-term targets. This means executives may be increasingly unable, not just unwilling, to pursue long-term value-creating activities like investing in research or training for their employees”.
Pharma CEO’s are under increasing pressure to produce value NOW. Pharma stocks often go up or down on news of new drug clinical trials. If they don’t succeed they really don’t care. They’ll leave with tens of millions of dollars in exit packages while the company continues to struggle.
Who’s to blame?
1ne: Wall Street – Analysts are focused on the short term profit picture and really don’t understand long term strategic visions. They continually upgrade or downgrade a pharma stock on news that they really don’t understand.
2wo: Pharma company Board of Directors – The Board of Directors is usually “an ol’ boys club”. They too are only interested in the short term, not the long term strategic vision.
3hree: Pharma company CEO’s – They are compensated too much and don’t have the backbone to stand up to Wall Street and big group investors.
Milton Friedman, who popularized the notion of shareholder primacy and pursuit of profit, once lamented that business leaders are often “incredibly shortsighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general.”
Friedman was right. The modern economy is not working for too many people, who have begun to equate short-term thinking with free-market capitalism and have had enough of both. The survival of business in general demands that we take the long view.