The Quarter and the Decade — Short-Termism vs. Long-Term Value

Quarterly numbers and decade-long value often point in opposite directions. A move that fattens dividends or this period's profit can cut into future competitiveness. This tug-of-war is not a clash between outside and inside; it runs inside the capitalist as well. Before condemning short-termism as a one-sided evil, look first at its structure.

01Why "the Quarter" and "the Decade" Point in Opposite Directions

A listed company is asked for numbers every quarter. The business value of a drug, meanwhile, takes a decade to grow — from development to launch and through lifecycle management. These two time horizons collide within one and the same decision. Squeeze R&D spending now and this period's profit grows fatter; but the pipeline a few years out grows thinner. The move that makes the current period look good and the move that builds future value point in opposite directions. That is what the tug-of-war really is.

What deserves attention is that this is not limited to an external clash of "short-horizon investors versus long-horizon management." Inside the head of a single executive, awareness of the share price and the vision for the business pull against each other. So the question is not "which is right" but "how do we handle this tension."

02Short-Termism as Value Destruction — The Itō Review

Cutting investment in the future to manufacture short-term numbers. The 2014 Itō Review confronted this head-on as the destruction of corporate value. Investment in things that take time to pay off — R&D, people — gets pushed back under quarterly pressure. The current period may look fine, yet the company's very capacity to earn grows thin. Short-termism is not "saving" but "eating into the future," was the report's reading.

As its prescription, the report pointed toward sustainably earning an ROE that exceeds the cost of capital and, through dialogue with investors, cultivating medium- to long-term value. Left alone, short-term profit eats long-term value. So a brake must be designed into the structure — that was its concern.

03Long Term Is No Excuse — The Cost of Capital as a Yardstick

Here let us also remove the opposite misreading. "Long term, therefore good" does not hold. Preserve an unprofitable business under the pretext of the long term and keep deferring the decision to exit, and that is a failure of discipline. While capital sits idle, that capital still bears an opportunity cost. Holding for a long time has, in itself, no value.

What, then, is long-term value? It is continuously exceeding the cost of the capital you have raised (the cost of capital). Not a single good quarter, but a sustained state of generating excess returns. So reading "short term versus long term" as "evil versus good" leads judgment astray. Both the short and the long have their own discipline. The yardstick is not the length of time but whether you clear the cost of capital.

04Designing for Managed Tension — The Two Codes and "Dialogue"

So how does one handle two forces that pull against each other? Japan's framework chose to manage the tension rather than erase the conflict. Its pillars are two codes. The Corporate Governance Code asks companies to take the enhancement of medium- to long-term corporate value as a basic principle. The Stewardship Code asks institutional investors for constructive, purposeful dialogue with their investee companies.

The two form a pair. Rather than letting short-term market pressure shake the business plan directly, they insert a buffer of dialogue in between. The investor asks before selling and fleeing; the company speaks to the medium- to long-term vision behind the numbers. The aim is not the elimination of conflict but the management of tension. It is a design that runs short-term discipline and long-term vision side by side on the table of dialogue.

05To the Materials-Review Floor — Reading Where the Pressure Comes From

How does this tug-of-war land in the practice of materials review? The aggressive promotional materials that come up before a reviewer often betray a pressure to "show results fast." Whether that pressure comes from a short-termism rushing the quarterly numbers, or from an investment decision aligned with a medium- to long-term business plan — when the source differs, so do the organization's dynamics and the words of persuasion.

The more a piece of material is driven by short-term pressure, the more it tends toward deviations: overstated efficacy, or claims that get ahead of the evidence. A material's eagerness to lean forward is often an expression of the tug-of-war over time horizons. On the review floor, when you ask "why did this expression come up in this form," suspecting the time horizon behind it raises the resolution. How the executive side takes on this tension is, moreover, two sides of the same coin with The Executive's View (Execution), Vol. 7.