A frequent criticism of the management of publicly-owned American companies is t

Question

A frequent criticism of the management of publicly-owned American companies is that they are too short-term oriented, too focused on fast returns, and that this negatively impacts their long term capital budgeting. Can you suggest a company, or industry, where this appears to be true. Why? How? Do the recent problems at Toyota suggest that the problem is spreading to other countries? How do we keep an emphasis on the "ong-term" from becoming an excuse for continued poor results is the "short-term."

Explanation / Answer

There are number of firms and industries that have a short term orientation and prefer to earn faster returns even when such an approach has a negative impact on the long term capital budgeting of the company. One such industry is information technology industry. In the IT industry the companies benefit on the basis of how quick they are in introducing new technology in the market. The prices of the shares of the companies in the IT industry are highly volatile that change with every new technology up gradation. The companies in the IT industry attract the investors because of their ability to earn faster returns. The short term return orientation of the company can affect the long term capital budgeting of the companies in the IT industry because the companies focus only on the short term profits and never on the long term profits. As a result a company might give up certain long term wealth maximization projects for the projects that have the potential to earn short term profits (Brochet, Serafeim & Loumioti, 2012).

The recent recall of vehicles by Toyota indicates that the problem of short term orientation to earn faster returns is prevalent not only in the American companies but is also spreading to the companies of other countries. The companies like Toyota that have been known for their quality cars are compromising with the quality of the parts used and the safety aspects of the automobiles. They are paying more attention to earning short term returns rather than on the long term goodwill and earning capability of the company.

In order to keep an emphasis on the long term from becoming an excuse for continued poor results in the

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