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PRAISE FOR SAVING CAPITALISM FROM SHORT TERMISM
“As Rappaport keeps on speaking out for the realities surrounding investment and speculation, our society will profit as it builds on his keen insights.”
―from the Foreword by John C. Bogle, founder of the Vanguard Group
“Al Rappaport brings insight and wisdom to the short-termism debate, fully demonstrating the way perverse incentives are undermining public companies and capital markets.”
―John Plender, Financial Times
"In this rigorous, useful, and delightful book, Rappaport undresses short-term financial incentives for what they are: parasites that draw the value-creating innovation out of companies. And he shows how executives can align long-term value-creating investments with the right investors' expectations."
―Clayton Christensen, Harvard Business School
“How to make managers focus on the long-run is one of the most consequential and difficult questions in corporate governance and is the subject of much debate and disagreement. Professor Alfred Rappaport’s insightful book is a valuable contribution to this important debate.”
―Lucian Bebchuk, Professor, Harvard Law School, and coauthor of Pay Without Performance
“Saving Capitalism from Short-Termism insightfully exposes the contradictions by which we incentivize money managers to require short-term focus by company managers. Again and again in rereading this book, I am struck with the author’s felicitous style in raising subject after subject in which I have long been interested―but, until this read, have not been able to resolve. Buy it, read it, and enjoy.”
―Robert A.G. Monks, founder ISS (Institutional Shareholder Services), Lens Governance Advisors, and The Corporate Library
“Capitalism fails when corporate managers and professional investors prefer their own interests to those the true owners of businesses. In Saving Capitalism from Short-Termism, Al Rappaport shows how new incentives schemes can deliver shareholder value for the 21st century.”
―Edward Chancellor, author of Devil Take the Hindmost: A History of Financial Speculation and member of GMO's Asset Allocation team
About the Book
Business leaders today obsess over quarterly earnings and the current stock price―and for good reason. Corporate incentives typically focus on short-term profits rather than long-term value creation. Nothing is more harmful to businesses―and to the broader economy.
Few business thinkers in recent decades have contributed more to this subject than Alfred Rappaport. As an author and educator, Rappaport is a pioneer in developing the principles of values-based management and is an acknowledged authority on how to make long-term shareholder value the essential driver of corporate strategy. His latest work, Saving Capitalism from Short-Termism, is a clarion call for conquering the addiction to short-term profit―and getting on the path to building long-term value.
Rappaport’s solution to short-termism is simple but profound: business leaders must align the interests of corporate and investment managers with those of their shareholders and beneficiaries. His plan includes:
- Gaining the commitment of senior management and the board to long-term value creation as their governing objective
- Incentives that reward CEOs, operating-unit managers, and front-line employees for delivering superior long-term value
- A major overhaul of corporate financial reporting that provides more relevant and transparent information to investors and other financial statement users
- Performance fees that align the interests of investment managers and shareholders
- Actively managed funds with concentrated holdings and long investment horizons that tilt the odds in favor of better long-term shareholder returns
If corporate and investment leaders do not address the problem of short-termism, more financial crises may be in store―and they are likely to be more severe and broader than the meltdown in 2008.
The trade-off is clear: We can continue to pursue short-term profit at the expense of economic vitality, individual financial security, and perhaps even the dominance of the free-market system itself. Or we can take the responsible path outlined in this book and generate innovation, quality, growth, and value over the long term.
- Sales Rank: #1424420 in Books
- Published on: 2011-08-11
- Original language: English
- Number of items: 1
- Dimensions: 9.30" h x .85" w x 6.40" l, .95 pounds
- Binding: Hardcover
- 256 pages
About the Author
Alfred Rappaport is the Leonard Spacek Professor Emeritus at Northwestern University’s J. L. Kellogg Graduate School of Management. He is the author of the business classic Creating Shareholder Value and coauthor with Michael Mauboussin of Expectations Investing. Rappaport has been a guest columnist for The Wall Street Journal, The New York Times, Fortune, and BusinessWeek. He created the Wall Street Journal Shareholder Scoreboard, an annual ranking by total shareholder returns of the 1,000 most valuable U.S. corporations, published annually from 1995 to 2008.
Most helpful customer reviews
3 of 3 people found the following review helpful.
SCFST:HTBLTVATBOFF (Catchy, huh?)
By Robert Carlberg
This book was of particular interest to me because I lived it. From 1986-2002 I worked for a $6 billion corporation (who shall remain nameless because they still have lawyers). During the Clinton boom years we bought several smaller competitors, but paid for it when Bush crashed the economy. I'm sure the board thought they were doing the right thing for shareholders when they brought in 'new management' but they couldn't have anticipated what happened next. With the new CEO's compensation tied directly to quarterly earnings, he immediately began selling off all the profitable divisions to consortiums of investors (including Berkshire Hathaway and ex-employees). When that ran out he laid off 40% of the workforce, senior staff first (including me). Finally he sold off all the buildings and real estate. By the end of his 4-year tenure he'd stripped the company of all assets worth having, while multiplying his own million dollar salary by 38 times. He retired to Bermuda -- but 26,000 loyal employees lost their jobs, their pensions and their retirement plans, and an 80-year old iconic company was cratered for personal gain.
In a nutshell this is the message of Alfred Rappaport's book. Although perhaps an extreme example of harvesting organs rather than administering medicine, the problem of public corporations being run for the personal profit of the directors has dominated the American financial landscape for thirty years. From the accounting scandals of Enron, WorldCom and Nortel to the dubious "off-balance" financial instruments of Liar's Poker and The Big Short: Inside the Doomsday Machine, from the "too big to fail" Wall Street firms who intentionally created the housing bubble knowing the taxpayers would cover their losses, to the current (as I write) debacle of Congress imploding the US economy to benefit the top 1%, the lack of long-term planning and goals is endemic and woven into the fabric of our post-Reagan trickle down (gush up) economy.
Chapter 1 charts the rise of what the author calls "short-termism" in the era of deregulation and SEC evisceration.
Chapter 2 identifies the culprits and there are plenty of them: Congress, the Federal Reserve, government bailouts, home buyers, appraisers, lenders, ratings agencies, corporate boards, Wall Street investment banks, institutional investors and program trading all share responsibility.
Chapter 3 explains how highly-competitive corporations are forced by the marketplace to keep their stock prices inflated, and to pay ever-more-dear executive salaries, stock options and bonuses.
Chapter 4 goes into how the stock market amplifies and exaggerates these effects.
Chapter 5 proposes new executive compensation schemes, such as tying pay to long-term market indexes instead of quarterly profits, and eliminating fast-vesting stock options.
Chapter 6 discusses how corporations themselves could break out of the short-term profit race, without losing shareholders.
Chapter 7 is entitled "An Overhaul of Corporate Financial Reporting."
Chapter 8 postulates how Wall Street firms could reform their short horizons.
Chapter 9 sums up the advantages of reforming the global capital markets.
Although Rappaport is excellent in his analysis of the problems, he loses a star for being, as reviewer Loyd Eskildson noted, a little pie-in-the-sky when it comes to his solutions. As Rappaport himself states (page 92), "This is no trivial task." In fact, when the criminals hold all the cards the task may be nearly impossible.
3 of 4 people found the following review helpful.
The Long View
By W. Sheridan
When the dominant social psychology was a blend of religion and tradition, the longer-term prospect of the fate of one's "eternal soul" was used as a vehicle of social control. Those who thought only in terms of short-term pleasures and desires were widely reputed to be "going to hell." The secularism of the modern age however, has undermined the notions of both "the soul" and "eternity" - the focus has radically shifted to prioritize both desires and pleasures. To the extent that any and all of us hold a secular perspective, the immediate, objective world of our senses has replaced the longer-term and spiritual zeitgeist.
Even with the modern emphasis however, there are intermediate-term concerns that do need to be recognized and addressed. Specifically, the requirements of both political economy and natural ecology are important for sustainability. Since most of us will live to see tomorrow, and many of us will live to see future decades, we do need to conduct ourselves in such a way as to assure that we do not undermine the very conditions that enable survivability. Therefore, we need to plan, both for what we should do, and what we should not do.
Recent capitalism (part of our political economy) has however, fostered an attitude of short-termism rather than recognizing and acknowledging the demands of the intermediate-term. As a result, unnecessary risks are being taken when this is inappropriate, and risk-avoidance is being adopted when that is inappropriate. Managers are focusing predominantly on their own interests, looking at the quarterly bottom line, and sacrificing both the interests of others, and the longer-term perspective in the process.
Rappaport provides a detailed analysis of the various short-comings that this short-term perspective entails. Performance at the executive level is NOT exemplary - rather it is mediocre in most respects, except as regards the pocket-books of those executives. Furthermore, too much risk is engaged in when those at the top believe they stand a chance of a spectacular gain. Concurrently, too little risk is engaged in when those at the top sense that the investment required will only pay-off after their terms of office are over.
With each inadequacy revealed, Rappaport suggests one, or a number of remedies. There is nothing unwholesome about any of these proposals - they are simply designed to assure that all the legitimate interests of the various stakeholders involved are taken into account and given their due. Unless we want the era of The Robber Barons to be replaced by an era of Managerial Extortion, we must find ways to implement Rappaport's solutions.
3 of 4 people found the following review helpful.
Bringing Back the Future
By M. T. Brouwer
This book is interesting to all, who want to understand how short-termism on financial markets caused stock market bubbles and hampered economic growth. In this world where professional funds managers invest people's savings a double conflict of interest has emerged. One conflict exists between funds managers and the people whose savings they invest in stocks. The second between corporate managers and stock owners. Both corporate and fund managers are rewarded for short term performance rather than long term value creation. Fund managers can either be passive and follow the index or reposition their portfolio regularly. However, such re-positioning does not contribute to long term value creation, if fund managers only look at quarterly data that contain operational income and expected costs and benefits of existing contracts. The uncertainty surrounding such accruals allows corporate managers to sketch a too rosy picture of future earnings of existing assets. Fund managers that react by buying the stock let stock price increase and both corporate and fund managers receive large bonuses. This procedure departs from discounted cash flow methods to valuate stocks that also look at the future value of new investments and not only at present data. Short-termism sacrifices the future by concentrating on the present. It seems to reduce uncertainty, but increases market risk by overvaluing present assets while neglecting future growth possibilities. Rappaport states that fund managers that reposition based on quarterly earnings data do a worse job with your savings than managers that track indexes. Only fund managers that make decisons based on individual interpretations of available information can outperform the market. Rappaport makes a strong case for installing the right incentives for both corporate and fund managers to pursue long term growth. Hopefully, recent financial and debt crises might inspire corporations and investors to change their ways.
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