Short-Termism Across Enterprises
Short time horizons are the popular villains of U.S. corporate governance.
Corporate critics argue that company management opportunistically sacrifices long-term company value for short-term profits. Management defenders contend that short-termism concerns are overblown and defy widely held theories about market behavior. Participants in this debate cannot even agree on whether there is a problem, much less what to do about it.
Current debates focus exclusively on publicly traded corporations. However, although these firms are economically significant, they are not the exclusive, the most common, or even the most economically important means of conducting multi-member economic enterprise. The full range of enterprises, including partnerships, LLCs, nonprofits, cooperatives, mutuals, and government-owned firms, also confronts time horizon problems. Unfortunately, legal discourse has not paid attention to them.
Until now.
I analyze the time horizon problem across the spectrum of organizational forms. This comprehensive effort, unlike a focus on publicly traded corporations, reveals cases of clear, inarguable, and acute problems arising from key structural differences between alternative organizational forms and publicly traded firms. Contextualizing the time horizon problem in this way offers several useful implications, both for other types of firms and for publicly traded companies. For other types of firms, I show several instances where short-termism—as well as the less-well-recognized phenomenon of long-termism—is present and incontrovertibly problematic, but fortunately also addressable through attainable regulatory interventions. For publicly traded firms, the experience of other forms shows that improvements in this space likely will be relatively small, but possible. I develop new suggestions based on other firms’ experience.
Although mismatched time horizons are a problem in corporate law, the exclusive focus on publicly traded firms is misplaced. To achieve maximum impact, efforts to identify and address the problem should be targeted at alternative methods of economic enterprise, rather than ignoring them.
About the Law and Economics Workshop
Michigan’s Law and Economics Workshop provides an opportunity for faculty and students from across the University to engage with cutting-edge law and economics research by leading scholars on a wide range of legal and policy topics.
Professors Adam Pritchard ([email protected]) and Gabriel Rauterberg ([email protected]) organize the workshop. If you would like to receive workshop announcements, please contact Alex Wroble ([email protected]) and ask to have your name added to the workshop’s email list.
