BOWER AND PAINE
has even attempted to quantify economic growth foregone due to
cuts in R&D expenditure driven by short- termism, putting it in the
range of about 0.1% per year. Other researchers, however, remain
skeptical. How, they ask, could corporate profi ts in the U.S. remain so
high for so long if short- termism were such a drag on performance?
And isn’t the focus on quarterly results a natural outgrowth of the
rigorous corporate governance that keeps executives accountable?
What We Actually Measured— and the Limits of
Our Knowledge
To help provide a better factual base for this debate, MGI, working
with McKinsey colleagues from our Strategy & Corporate Finance
practice as well as the team at FCLT Global, began last fall to devise
a way to systemically measure short- termism and long- termism at
the company level. It started with developing a proprietary Corpo-
rate Horizon Index. The data for this index was drawn from 615 non-
fi nance companies that had reported continuous results from 2001
to 2015 and whose market capitalization in that period had exceeded
$5 billion in at least one year. (We wanted to focus on companies
large enough to feel the potential short- term pressures exerted by
shareholders, boards, activists, and others.) Collectively, our sample
accounts for about 60%–65% of total U.S. public market capitaliza-
tion over this period. To further ensure valid results and to avoid bias
in our sample, we evaluated all companies in our index only relative
to their industry peers with similar opportunity sets and market con-
ditions and tracked them over several years. We also looked at the
proportional composition of the long- term and short- term groups to
ensure they are approximately equivalent, so that the diff erential per-
formance of individual industries cannot bias the overall results, and
conducted other tests and controls to ensure statistical robustness.
One fi nal caveat: While we fi rmly believe our index enables us
to classify companies as “ long- term” in an unbiased manner, our
findings are descriptive only. We aren’t saying that a long- term
orientation causes better performance, nor have we controlled for
every factor that could impact the relationship between those two.