CEO Daily: Wednesday, 8th February
Does pressure to deliver short-term earnings undermine the long-term performance of U.S. companies?
That’s been a hotly-debated issue in corporate America for a long time. (I remember the day in the 1980s when the late Senator Paul Tsongas visited The Wall Street Journal to inform us he was going to run for president and make eliminating quarterly earnings a key plank in his campaign!) But the debate has gotten hotter in the last decade, with surveys of CEOs suggesting pressure to deliver short-term results is on the rise.
That debate is usually conducted without data. But this morning, McKinsey’s top man Dominic Barton and his colleagues put some meat on the bones, issuing a new study that uses a data set of 615 large-cap and mid-cap U.S. publicly-listed companies. They’ve constructed a “Corporate Horizon Index” that attempts to measure a company’s short-term focus by looking at how much it invests, whether it uses accounting tactics to boost quarterly earnings, whether it engages in share buy-backs to boost earnings per share, etc.
The result? Companies with a long-term orientation have performed significantly better over the last decade on a host of measures—revenues, earnings, profit, and market capitalization. The report concludes that if all other firms had appreciated as fast as the long-term firms, “U.S. public equity markets could have added more than $1 trillion in incremental asset value from 2001 to 2014.” Companies focused on the long-term also created, on average, 11,000 more jobs.
One problem with the data is that it shows correlation, not causation. The short-term focus of American companies may be causing them to under-perform; but it’s also possible that causation works in the opposite direction, with under-performance leading to short-term earnings pressures. It’s easy for Google to invest in the long term, given its pipeline of profits.
But Barton believes there is an important lesson here. “While it’s impossible to completely untangle cause from effect,” he says, “we firmly believe that, as our index suggests, keeping your eye on long-term value creation is the best way over time to deliver superior performance.”
You can read the paper here. More news below.
• Rogue ESPN Spoils Disney's Party
An alarming deterioration at ESPN, one of Disney’s most reliable cash cows, overshadowed what would otherwise have passed for a decent quarter at the group. The movie business posted three big hits, making it the first studio ever to post $7 billion in box office revenue in a calendar year. The new Shanghai theme park plumped up profits in the resorts division. But it was the loss of subscribers and drop in ad rates at the sports cable channel—together with a rise in costs for broadcasting NBA games—that grabbed the attention. Bob Iger’s hints about staying on beyond 2018 couldn’t stop the shares slipping slightly in after-hours trading. Fortune
• GM Stokes Wider Stagnation Fears
Shares in General Motors tumbled nearly 5% in after-hours trading after the company said inventories of unsold vehicles in the U.S. rose by a third at the end of 2016. The figure played to market fears that the long boom in auto sales is dead, and a $500 million foreign exchange loss that the company blamed on the fallout from Brexit hardly helped the mood. Despite hefty share buybacks, the company said per share earnings this year will probably not be any higher, not least due to another year of losses in Europe, where it has not made the most of the opportunity created by Volkswagen’s reputation crisis. Fortune
• Mondelez Frets About Disruption to Global Business
Mondelez CEO Irene Rosenfeld warned that President Trump’s challenge to the existing global trade order could badly disrupt its business. Rosenfeld’s warning came after a worryingly low 0.6% rise in comparable sales worldwide in the fourth quarter, adjusted for currency fluctuations. Profits performed better on the back of cost-cutting in its supply chain and at its corporate HQ. Reuters
• Bakken the Winning Horse
The U.S. Army Corps of Engineers will approve the final permit for the Dakota Access Pipeline later today. It's a big victory for the pipeline operator Energy Transfer Partners and for the companies producing oil in the Bakken shale deposit, who will now find it easier to get their products to market (chiefly Gulf coast refineries). It’s a defeat for environmental and Native American groups who argued it posed a pollution threat and would desecrate sacred local sites (overlooking the inconvenient fact that there was already a pipeline running pretty much where the DAP link is planning to go). The permit comes after an executive order from President Trump to expedite the project. Reuters
Around the Water Cooler
• Cabs Might Fly (and Uber Might Turn a Profit)
Uber has hired NASA veteran Mark Moore, a man noted for a pioneering scientific paper on electric vehicles capable of taking off and landing like helicopters. Moore will head Uber Elevate, the company’s ‘flying car’ project (which is still behind a couple of other startups in the sphere, including two backed by Alphabet’s Larry Page). Cynics would argue that the company, which has failed so far to meet its original goal of creating a monetizable monopoly on its core ride-sharing market (judging by the few financials that have leaked out of it), seems in need of a new horizon to keep its investors excited. Fortune
• Pence the Tie-Breaker
Betsy DeVos was confirmed as the new Education Secretary, but only after Vice-President Mike Pence was forced to intervene to break a tie in the Senate after an all-night debate. DeVos’s support for charter schools and for-profit colleges had antagonized Senate Democrats and teachers’ unions. Two Republican Senators also opposed DeVos after a confirmation hearing that, by most accounts, exposed an incomplete grasp of the education system she’ll be overseeing. Fortune
• Greece – The (IMF Managing) Director’s Cut
It’s the sequel nobody wanted but everyone knew was coming anyway. The International Monetary Fund set the stage for quitting the bailout of Greece, after a routine (‘Article 4’) assessment of its economy came more loudly than ever to the conclusion that the country needs aggressive debt relief from its Eurozone creditors. The response from the Eurozone, only months before elections in the Netherlands, France and Germany, was predictably scornful, with Dutch finance minister Jeroen Dijssselbloem implicitly accusing the Fund of dishonesty. While the Eurozone has probably insulated itself against the first-round financial shocks from Greece abandoning the euro, the blow to the EU’s political prestige so soon after Brexit would be significant. As such, “Grexit” remains a less likely outcome than yet another time-buying fudge. FT, metered access
• Moelis Snags Cherished Saudi IPO Mandate
Saudi Arabia has chosen the boutique investment bank of veteran dealmaker Ken Moelis to be sole independent adviser for the planned IPO of state oil company Saudi Aramco, ahead of the likes of Goldman Sachs and Morgan Stanley. It’s not clear how much the mandate will actually be worth in monetary terms (the IPO, tentatively scheduled for next year, will reportedly aim to raise up to $100 billion, derived from a total valuation of over $2 trillion). But it’s a stunning coup for a company that’s only 10 years old, and could cause some profound soul-searching among its bigger competitors. The big fish in banking will have to comfort themselves with the thought that there are still hundreds of millions in underwriting fees still to play for. FT, metered access Summaries by Geoffrey Smith Geoffrey.email@example.com;