BOWER AND PAINE
After running the numbers on these indicators, two broad groups
emerged among those 615 large and midcap U.S. publicly listed com-
panies: a “ long- term” group of 164 companies (about 27% of the
sample), which were either long- term relative to their industry peers
over the entire sample or clearly became more long- term between
the fi rst half of the sample period and the second half, and a baseline
group of the 451 remaining companies (about 73% of the sample).
The performance gap that subsequently opened between these two
groups of companies off ers the most compelling evidence to date of
the relative cost of short- termism— and the real payoff that arises
from managing for the long term.
Trillions of Dollars of Value Creation at Stake
To recap, from 2001 to 2014, the long- term companies identifi ed by
our Corporate Horizons Index increased their revenue by 47% more
than others in their industry groups and their earnings by 36% more,
on average. Their revenue growth was less volatile over this period,
with a standard deviation of growth of 5.6%, versus 7.6% for all
other companies. Our long- term fi rms also appeared more willing to
maintain their strategies during times of economic stress. During the
2008–2009 global fi nancial crisis, they not only saw smaller declines
in revenue and earnings but also continued to increase investments
in research and development while others cut back. From 2007 to
2014, their R&D spending grew at an annualized rate of 8.5%, greater
than the 3.7% rate for other companies.
Another way to measure the value creation of long- term compa-
nies is to look through the lens of what is known as “economic profi t.”
Economic profit represents a company’s profit after subtracting a
charge for the capital that the fi rm has invested (working capital, fi xed
assets, goodwill). The capital charge equals the amount of invested
capital times the opportunity cost of capital—that is, the return that
shareholders expect to earn from investing in companies with similar
risk. Consider, for example, Company A, which earns $100 of after- tax
operating profi t, has an 8% cost of capital and $800 of invested capital.
In this case its capital charge is $800 times 8%, or $64. Subtracting the