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The main problem here is what is sometimes referred to as "Financialism."

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."

I think that one of the problems with the investment world today is the disconnect between share owners and the actual entities of which they own shares. Mutual funds. I have a fund in my IRA, for example, that holds, among its top 10 holdings, NVIDI, Microsoft, Apple, and Netflix. So in effect, I own shares of those entities. But unlike an individual shareholder, I have NO vote, or at least no easy way to vote my shares. They are held on my behalf and voted on my behalf by the company running the mutual fund.

I think this is true for a very large chunk of what’s invested on Wall Street. 401K and IRA investments most likely have investments in a multitude of entities, but the people that own those shares via their fund have no real connection with the entity for which they technically own a small portion.

When I had shares in company stock, many years ago, we had occasion to vote as our share ownership gave us some voice in matters that were brought up from time to time.