The causes of short-termism
The most commonly cited explanation os short-termism by UK companies is the relationship with financial markets; many people believe that the plc structure encourages short-termism. The reason for the pressures is that city investors are more important today than private shareholders, and the city investors are measured on a quartly basis. So if city investors are measured every three months, no wonder they're more interested in the short-term performance of the company.
Other important causes of short-termism:
- The widespread use in the city of short-term focused performance measures such as earnings per share as a way of judging the bonus level to be paid to the directors; EPS can be boosted by the ultiate short-termism meausre: buying shares back from shareholders; this boosts a company's gearing yet creates a higher share price and therefore bonus level.
- The threat of a takeover.
- The bosses of UK firms are unusually likely to have had a career based in finance; therefore they have no inherent understanding of the long term thinking that is more instinctive among engineers, scientists and marketing executives.
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