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The main problem here is what is sometimes referred to as "Financialism."
It's a side effect of the growth of distributed, ubiquitous Information Technology, which allows the suppliers of Capital (shareholders and lenders) to micromanage the business, taking control away from the operational personnel who actually know how the business operates (aside from financing activities).
A perfect example of this is all the Boeing planes crashing due to changes in the company initiated by the financialist managers who now run it.
Personally, I do not see how the clock can be turned back on this. Capital has always had the right to call the shots, but now they have been greatly empowered by the IT.
Capitalism is BY FAR the most productive system yet devised, creating far more of everything to go around; however, Capitalism has Winners and Losers. That's the essence of competition. In some cases, like processed foods and Boeing planes, one "Loser" is society as a whole in the form of receiving inferior products. The built-in cure is for competition to demonstrate greater value to Capital by providing better value to the consumers of the products.
Also, of course, there are safety nets such as Social Security to mitigate the worst of the downside effects of competition.
I asked Grok:
Several interconnected factors drive public companies' intense focus on quarterly profits, often leading to short-termism—a prioritization of immediate results over long-term sustainability. This behavior isn't mandated by law but emerges from market pressures, incentive structures, and reporting norms that collectively encourage decisions like cutting R&D spending, delaying investments, or engaging in stock buybacks to boost short-term metrics. Below, I'll outline the primary drivers based on economic analyses and expert insights.### 1. **Investor and Shareholder Pressure** Institutional investors, hedge funds, and activist shareholders often prioritize short-term returns due to their own performance benchmarks, such as quarterly portfolio evaluations. This creates a cycle where companies feel compelled to meet or exceed earnings expectations to avoid stock price drops, proxy fights, or takeovers. For instance, a 2006 Duke University study found that 78% of executives would sacrifice long-term value for a short-term share price boost. Activist investors can exploit short-term volatility, pushing management toward immediate profit maximization rather than strategic investments. Social media and rapid information flow amplify this, as companies face swift criticism for missing quarterly targets, fueling a "vicious circle" of short-term emphasis.
### 2. **Executive Compensation and Incentives** CEO and executive pay is frequently tied to short-term metrics like earnings per share (EPS), stock price performance, or quarterly bonuses, aligning personal gains with immediate results. This can lead to "earnings management"—manipulating figures through cost cuts or financial engineering to hit benchmarks. Stock options with short vesting periods exacerbate this, as do pressures from nearing retirement or job insecurity. As one analysis notes, this agency problem—where managers prioritize their interests over the company's long-term health—contributes to underinvestment in innovation.
### 3. **Quarterly Reporting and Earnings Guidance** U.S. public companies must file quarterly reports (e.g., SEC Form 10-Q), which spotlight short-term performance and invite scrutiny from analysts and investors. Many also voluntarily provide earnings guidance, creating an "earnings game" where missing forecasts triggers stock sell-offs. While some argue this promotes transparency, critics say it drives artificial behaviors like deferring expenses or boosting buybacks to meet targets, at the expense of long-term planning. Proposals to shift to semi-annual reporting (e.g., floated by former President Trump) aim to reduce this, but evidence is mixed on its impact.
### 4. **Market and Structural Dynamics** Broader trends like high-frequency trading, short-term investor horizons, and economic uncertainty encourage a focus on immediate liquidity and returns. Structural shifts, such as hiring external CEOs (who may prioritize quick wins) and decentralizing R&D toward "development" over exploratory "research," further entrench short-termism. Post-pandemic, some companies shifted from market share growth to quarterly profit maximization, exploiting disruptions like supply chain issues for price hikes. This can hollow out firms, reducing innovation and productivity growth economy-wide. ### 5. **Cultural and Behavioral Factors** A "quarterly capitalism" mindset, influenced by economic theories like Milton Friedman's shareholder primacy, has normalized short-term gains. Behavioral biases, such as overconfidence in short-term forecasts or fear of missing benchmarks, compound this. As one executive put it, boards and investors demand constant growth, leading to decisions that "maximize next quarter's profit" even if it means forgoing future opportunities.
These factors create a self-reinforcing loop, where short-term success boosts stock prices and executive rewards but can undermine long-term resilience, such as by stifling R&D or employee development. However, some companies resist by attracting long-term investors, reforming incentives, or ceasing quarterly guidance, leading to better overall performance. Addressing this requires reforms like aligning duties between directors and shareholders or incentivizing long-term holdings.
I like the last line. Requiring executive compensation to be long-term rather than short-term would be a great start. But, as Scott Adams says, "Any system that can be corrupted will be corrupted."
Boeing is a poster child of finance gone wild. Since the turn of the century they have spent over $90 billion in stock buybacks, not R&D nor product development/improvement. Between 2013-2019 they spent $43 billion on stock buy backs. Then in 2020 they requested a $110 billion bailout from government.
This is a perfect illustration of what happens when a company prioritizes the wealth of short term traders over long term investments in innovation, safety and product quality.
This has been done to American companies on a continual basis since the late ‘90s.
“Capital has always had the right to call the shots”
Only if the IPO is written/issued by them and even then savvy creators should walk if there’s to much meddling/manipulation involved.
Another side of this is the rampant naked short selling of smaller cap entities. That’s probably cost us a few million jobs and definitely thousands of businesses as it’s been going on...