Why and how to “embrace the longer-term time horizons needed for a healthier economy that benefits all”
This is one of two books about contemporary economics that I recently read, the other being John Bogle’s The Clash of the Cultures: Investment vs. Speculation. Both Bogle and Alfred Rappaport have much of substantial value to say about what they view as a serious and on-going threat to economic health within and beyond the United States: the destructive threat of short-termism. According to Rappaport, it “means choosing a course of action that is best in the short-term, but that is suboptimal, if not out-and-out destructive, over the long term [and] has reached crisis proportions because business has failed to adapt its practices to an economy that is increasingly dominated by professional managers who are responsible for other people’s money. We urgently need practical means of combating short-termism and revitalizing the economic future.” What specifically must be done? Rappaport responds to that question in this book. For example, he stresses the overriding importance of cumulative future cash flows (DCFs) discounted by the appropriate interest rate.
As Bogle acknowledges, “I am profoundly concerned about the overbearing focus of our financial markets on short-term movements in stock prices, at the expense of the traditional focus on the long-term creation of intrinsic corporate value.” What specifically does Bogle recommend be done? He responds to that question in The Clash of the Cultures and in the Foreword to this book.
These are among the dozens of passages in the book that are of greatest interest and value to me. They also give at least some indication of the range of subjects on which Rappaport focuses.
o The Tyranny of Short-Termism (Pages 4-7)
o Red Flags (21-22)
o Institutional Investors (37-40)
o Erosion of Trust (40-42)
o The Legitimacy of Shareholder Value (49-54)
o Obsession with Earnings Compromises Shareholder Value (61-66)
o Performance Measurement (71-74)
o Shortcomings of the Price/Earnings Multiple (76-78)
o The Wisdom of Crowds (83-85)
o Constant-Dollar, Fixed-Shares, and Megagrants (106-111)
o Incentives for Front-Line Employees (116-122)
o Gaining Commitment (129-135)
o A Dozen Essential Habits of Long-Term Value-Creating Companies (136-152)
Note: One man’s opinion, the “Dozen Essential Habits” portion of the narrative (all by itself) is worth far more than the cost of the book.
o The Corporate Performance Statement (163-172)
o The Performance Measurement Conundrum (197-200)
I share Rappaport and Bogle’s concern about “how obsession with short-term performance seriously comprises the potential of companies, the economy, and the savings that individuals need to accumulate for retirement.” Let’s all hope that, as President Obama’s second term soon begins, there will be an all-out bipartisan governmental commitment in collaboration with leaders in other sectors to “embrace the longer-term time horizons needed for a healthier economy that benefits all.”
No brief commentary such as mine can possibly do full justice to the scope and depth of material that Alfred Rappaport provides in this volume but I hope that I have at least suggested why I think so highly of him and his work. Also, I hope that those who read this commentary will be better prepared to determine whether or not they wish to read it and, in that event, will have at least some idea of how the information, insights, and wisdom could perhaps be of substantial benefit to them and to their own organization.