Are markets short term? Are managers long term?
The Discussion Issue
A key factor in whether you choose to go with a market-based system for measurement/evaluatoin or an alternative system is the time horizon of the market. There are many who believe that markets are too "short term" to be trusted and that companies that make decisions that are in their long term best interests often get punished by markets for doing so. That may very well be the case but if so, it cannot just be posited as a belief or supported with anecdotal evidence.
The Amazon Case
At the risk of contradicting myself on the use of anecdotal evidence, Amazon is a great case study for a company where the market and managers should be in tension, if markets are short term. Jeff Bezos, the CEO of Amazon, has made it very clear that he is focused on the very long term, notwithstanding what markets may think of his actions.
- The first article, by James Stewart in the New York Times, is laudatory to Mr. Bezos, precisely because of this long term focus, though it seems to leave the impression that the market has not been kind to Amazon, because of this focus.
- The second link is to a blog post that I made, in response to James Stewart's article, taking on his claim that markets were punishing Amazon for being too long term
- The third link is to a Harvard Business Review article that highlights CEOs who have had long term visions for their companies, though it does not quite confront the question of whether markets have punished them or rewarded them as a consequence.
- The final link is to Amazon's financials on Yahoo! Finance. Take note of their current market capitalization and then take a look at their financial statements - look at revenue growth and net income.
- Is Amazon run with a long term focus? If the answer is yes, what do you base that conclusion on? Is there an item or items in the financial statements that you can use to back up the statement?
- Is the market punishing Amazon for being long term? Again, if the answer is yes, what is the basis? If the answer is no, what is the basis?
- Can you think of a company that you think is run for the long term which you believe is being punished in the market for that focus?
- Can you think of an action/ event that you can focus on that would let you isolate whether markets are long term or short term? (For example, you could look at announcements of R&D investments by companies, which reduce current earnings but presumably feed into future growth, and look at market reactions to those announcements)