A double short term bias too often prevails over long term rationality.

The sharp double edge of short-termism.  And how this too often works against us investors.

A double whammy.  The short term bias is further enhanced by professional institutional fund managers of large companies. Which themselves are managed with a short term bias due to professional managers job bouncing.

The horrific
US induced horrific financial crisis of 2008 was brought on in good part by
short-termism.  We all know this is a
near epidemic near disease these days in many company endeavors -as the short
term bias too often prevails over long term rationality.

Short term metrics
and incentives as applied to business based on current-period financials, just
about by definition end up promoting the interest of commission seekers, bonus
earning senior management -along to short term investors. Often this is exactly
counter to the legitimate bona fida interest of a company’s long term viable
interest, namely its shareholders, customers, partners and employees.

In the book “Saving
Capitalism from Short-Termism” 
author Professor Alfred Rappaport persuasively shows that the inordinate
and ever increasing focus on short term results by corporations is due to the
fact that business managers, fund managers and others have personal interests
that are in direct conflict with the interest of the organizations they are
paid to manager -or represent.  Professor
at Northwestern’s Kellogg of Graduate School of management, Rappaort calls this
the “agency capitalism” which contrasts with “entrepreneurial capitalism.”   

It used to
be that most businesses were managed by their principal owners rather than by
professional managers, which are paid to serve as agents for the
shareholders.  Fact is, most large
companies in Thailand (as compared to smaller companies) are managed by
professional managers, not by principal owners.   These are paid salaries and
incentives which rarely align well with the best long term interest of the
shareholders in that company.   Same as is so prevalent in our times, around the world. Same as is so prevalent in our times, around the world.

Astute
senior managers often change jobs frequently by climbing the corporate
ladder only to look out for their own career advancement.  You can hardly blame such exec’s for cleverly
managing expectations and short-termism and so their bonus -even while
doing this might not (and often is not) in the viable long term interest of the
company’s shareholders. Some might even make risky one way bests by having
little to lose and much to gain if they are right.

This
conflict of interest between professional managers and shareholders is
exponentially exacerbated then by the reality that most shareholders themselves
are these days increasingly also represented by agents, in the form of
mega institutional funds and its often transient managers.  

In the US,
in just 20 years since I left to Thailand for instance, the proportion of
shares directly owned by individual investors, as opposed to institutions and managed
funds declined by more than half, from 56% to 27%.  That is a huge change. According to Professor
Rappaport, 41 of the 50 largest financial funds are owned and operated by even/ever
larger financial conglomerates.  Not only
so have company managers become agents but even these mega shareholders
themselves, are now agents.  All geared
and greased with conflicts toward shorterm-ism.  This has furthered an orgy of self-interested wealth
transfer; as such companies managers and the fund managers alike, respond quite
rationally to their own self-serving economic short term incentives.

Professional
managers in larger companies, as well as professional investment fund managers
to institutional funds have a long and increasing record of job hunting and then
job bouncing with the average time employment record on the decrease for many
years.

Contrast
this to smaller Thai stock exchange listed companies.  These do not -or barely have- institutional
investors as shareholders (as these firms are not big/liquid enough for such
largesse investors) and are most always managed by the original owners whose interest
is far more often aligned what is in the best interest of the company in the longer
term.  As they themselves are the largest
shareholders.

Besides the long
record here of superior investor performance in smaller cap’s,  where
would you prefer to rationally invest your own hard earned savings?

Paul A. Renaud.

www.thaistocks.com