Why Are Public Companies Too Short Term Focused?

Public Companies Too Short Term Focused 2Boards of public companies, responding to investor demands, often pressure management to meet short term earnings estimates

DOMINIC Barton, global MD at McKinsey, talks with Tom Keene about how corporate boards of publicly listed companies tend to be too short term focused.

Barton explains that corporate boards, responding to investor demands, often pressure management to generate strong quarterly earnings. An increasing trend over the last 30 years, this short term focus comes at the expense of longer term investments in the company’s future. Barton explains that, based on McKinsey research, 55% of CFOs will not take a value enhancing long term investment if it will negatively affect the company’s quarterly earnings.

If pressure from investors causes excessive short term focus, then one available solution for public companies is privatisation. Barton suggests that private companies have more time and opportunity to make bolder long term investments because they are not subject to constant scrutiny from investors.

This insight helps to explain Michael Dell’s plans to privatise Dell. Best known as a PC manufacturer, Dell aims to shift its business towards high-margin enterprise services, software and cloud computing. Dell’s Chief Commercial Officer, Steve Felice, has stated that privatising Dell will make transforming the business much easier:

“When you do something like that, it makes your results maybe less predictable … We don’t feel the current structure as a public company helps us move that transformation along. We would rather do it without people looking at quarterly results.” (The Australian)