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Study notes

Short-termism

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Short-termism arises when a business prioritises short-term rather than long-term performance.

Revision Video - Short-termism

Management who can be described as "short-termist" tend to emphasise certain performance measures, such as:

  • Share price
  • Revenue growth
  • Gross & operating profit
  • Unit costs & productivity
  • Return on capital employed

As a possible consequence, other more longer-term measures of business performance might become less important, such as:

  • Market share
  • Quality
  • Innovation
  • Brand reputation
  • Development of employee skills & experience
  • Social responsibility & sustainability

Possible Indicators of Short-termism

How might you tell that the management of a business have a short-termist outlook?

Potential indicators might include:

  • Management bonuses and other financial incentives based on achievement of short-term objectives
  • Low or falling investment in R&D (including compared with competitors)
  • High dividend payments rather than reinvesting profits
  • Overuse of takeovers rather than internal growth

Reasons Why Short-Termism Has Become More Prevalent

It is often argued that too many firms, particularly quoted companies, have become increasingly short-termist (although there are some notable exceptions such as Unilever plc).

Possible reasons include:

  • Stock market (investor) focus on latest financial performance
  • Reliance on bonuses based on short-term performance (including to attract new management)
  • Frequent changes in leadership & strategy (e.g. through takeover or as a result of falling share prices)

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