Marshmallow Capitalism: How to End the Cycle of Short-Term Behavior
In the 1960s and 1970s, Stanford researchers conducted a series of tests famously known as the Marshmallow Experiment. In the studies, a child was given a choice between a marshmallow (or other treat) that he or she could have immediately, or two marshmallows if the child was willing to wait. Years down the road, the kids who had been able to wait showed higher levels of development, both as rated by their parents and measured by factors like SAT scores—suggesting an important link between delayed gratification and long-term success.
In today’s markets, too many companies resemble the child who can’t wait. Companies seek to maximize profits today, often at the expense of greater growth tomorrow. To be fair, this is not always their fault—the markets have an unquenchable thirst for quarterly profit, with little regard for the bigger picture.
Corporate leaders, however, can help change the cycle of short-termism by developing—and communicating—their strategies for long-term growth. By explaining to investors what drives real value and how far-sighted investments drive returns, they can attract the “patient capital” that will help them achieve their long-term goals and ultimately provide investors with greater returns.
In the wake of the financial crisis, many companies have sacrificed capital expenditures and have sometimes even increased debt to fund share buybacks and dividend increases. Returning cash to shareholders is an appropriate part of capital strategy, but it shouldn’t crowd out the steps that will drive longer-term value for those same investors.
There’s a balance, of course. Companies must satisfy markets and shareholders with near-term results, but they also should focus on making the investments—in technology, equipment, and employee development, for example—that will help them succeed for years to come.
As a fiduciary investor, our primary concern at BlackRock is the financial future of our clients. That means not just focusing on today, or even tomorrow, but sometimes 5, 10, or 20 years down the road. And that’s why we believe it is so important to rebuild a corporate culture focused on long-term value and stability. It’s better for profits, it’s better for workers, it’s better for the economy—and it’s better for investors.
Photo: oksix / shutterstock
Students at University of Alabama at Birmingham
9yMy thoughts exactly sacrifice now so that we can Live Later.
Excellent
Capital Steward | Alum BlackRock and Neuberger Berman
9yA good read on eve of CORPaTH 2014 Summit & Crystal Globe Awards where stakeholders gather to consider how best to preserve worker retirement security and to honor dedicated worker advocates like Marc Perrone & Sean McGarvey.
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9yIn a period of long sustained cheep credit, even after the downturn of 2007-08, the ability to finance dividends and stock buy backs has created the ability of companies to constantly live quarter to quarter, simply looking to beat next quarters EPS. I think when you take cheap credit, the need to hit expectations along with a very stringent and ever growing regulatory environment across a wide range of business sectors, it simply creates and even rewards this type of short term thinking. I am not sure pay structures are really at the heart of this, though they certainly can and have contributed in the past. I look at the amount of EPS being generated by stock repurchases over the past five years and I see a very scary reality that will eventually come to pass when rates go up on all of that LIBOR plus floating rate debt out there that has funded so very much of this stock repurchasing party. Companies on a large scale seem either unable to and or incapable of expanding their footprint either geographically and or intellectually. True core growth and intellectual growth seem to be a thing of past for many companies. I have a hard time believing many of these companies have come to the end or near the end of their companies life cycles, but that is what their B/S's and I/S's have been telling you for the past 4 to 5 years.