THE ERROR AT THE HEART OF CORPORATE LEADERSHIPcapital charge from profi ts gives $36 of economic profi t. A company
is creating value when its economic profi t is positive, and destroying
value if its economic profi t is negative.
With this metric, the gap between long- term companies and the
rest is even bigger. From 2001 to 2014 those managing for the long
term cumulatively increased their economic profit by 63% more
than the other companies. By 2014 their annual economic profi t was
81% larger than their peers, a tribute to superior capital allocation
that led to fundamental value creation.
No path goes straight up, of course, and the long- term companies
in our sample still faced plenty of character- testing times. During
the last fi nancial crisis, for example, they saw their share prices take
greater hits than their short- term counterparts. Afterward, however,
the long- term fi rms signifi cantly outperformed, adding an average
of $7 billion more to their companies’ market capitalization from
2009 and 2014 than their short- term peers did.
While we can’t directly measure the cost of short- termism, our
analysis gives an indication of just how large the value of what’s being
left on the table might be. As noted earlier, if all public U.S. compa-
nies had created jobs at the scale of the long- term- focused organiza-
tions in our sample, the country would have generated at least fi ve
million more jobs from 2001 and 2015—and an additional $1 trillion
in GDP growth (equivalent to an average of 0.8 percentage points
of GDP growth per year). Projecting forward, if nothing changes to
close the gap between the long- term group and the others, then
the U.S. economy could be giving up another $3 trillion in foregone
GDP and job growth by 2025. Clearly, addressing persistent short-
termism should be an urgent issue not just for investors and boards
but also for policy makers.
Where Do We Go from Here?
Our research is just a fi rst step toward understanding the scope and
magnitude of corporate short- termism. For instance, our initial
dataset was limited to the U.S., but we know the problem is a global
one. How do the costs and drivers diff er by regions? Our sample set