Going long.

• Author: Shaw, David
• Position: EDITOR'S NOTE - Editorial

Soon after the founding of Directors & Boards more than 40 years ago, the job of public company managements and boards became more focused on delivering results in the current quarter, and the next quarter, and the next quarter after that, while returning profits to shareholders in greater proportion to investments in future products and services.

The rise of short-termism can be traced to activist investors in the early 1980s, who saw that company share prices could be boosted through changes in management, divestitures and acquisitions, and a more aggressive focus on building profits through leaner workforces and reduced R&D budgets.

There was nothing wrong with shaking things up in Corporate America in the 80s. But there is nothing particularly right about continuing to measure corporate performance solely by factors which maximize share prices now, potentially at the expense of the creation of longer-term value and performance. While share buybacks and dividend increases can return excess cash to shareholders, there's a complex question about what "excess cash" really means--especially during an extended bull market, where share prices can outpace profit growth, P/E ratios can widen, and dividend yields decline.

When the inevitable market correction occurs, whether due to changing economic conditions, or the popping of a bubble, or through the 'wisdom of crowds,' P/E ratios decline and dividend yields grow, but significant shareholder value is lost through declining stock prices. And many companies are left with reduced cash, and the inability to effectively rebuild revenues and value. It's at this point that the lack of balanced investments in the future becomes most painful.

In this issue, we examine the increased calls from major institutional investors and corporate governance experts for managements and boards to take a longer-term approach to their...