How Long-Termism Can Boost Firm Performance
For technology leaders, the real issue is not whether long-term investment is desirable, but who is authorised to defend it when quarterly pressure rises. The articleโs core implication is that durable performance depends on making time horizon a governed management choice, not an optimistic slogan. That means boards and executive teams need explicit decision rights for investments whose payoff sits beyond the current planning cycle.
In practice, this shifts attention from approving individual projects to setting a portfolio rulebook. CIOs, CTOs and transformation leaders should ask whether funding decisions reflect a balanced view of resilience, scalability and customer experience, or whether they systematically reward short-term efficiency. The trade-off is clear: more capacity, redundancy or capability-building can depress near-term metrics, but underinvestment can create far larger operational and reputational costs later.
The management question is how to make patience measurable. That usually means changing the evidence presented to investment committees: not just ROI, but leading indicators such as service continuity, recovery time, adoption readiness, talent retention and options created for future growth. If those measures are absent, long-termism remains vulnerable to being overruled by whichever metric is easiest to report.
Leaders should next ask: Which strategic capabilities are being underfunded because their value is delayed? Which executive incentives still punish patience? What communication is needed so the business understands why some investments must be judged over several years rather than several quarters? Those questions matter because long-term value creation is as much an operating model challenge as it is a finance one.
With the freedom to plan across time horizons, executives are more likely to invest in operational capabilities that can bring long-term shareholder value.
When Amazon went public in 1997, founder and then CEO Jeff Bezosโ message to shareholders was clear: His focus was on creating long-term value through bold operational investment. The following year, as promised, Amazonย doubled its distribution capacity and more than tripled its inventory.
And the rest, as we know it, is history. However, not many companies managed to follow in the footsteps of the tech giant, which by today, has a market capitalisation of over US$ 1.9 trillion. The reason: It is hard to escape the entrapment of โshort-term Wall Street reactionsโ as Bezos called it, or simply, the need toย create value in the short term.
Escaping managerial short-termism
Executives are constantly faced with shareholder pressure to meet short-term performance targets such asย earnings-per-share (EPS). When the focus is to make the companyโs financial performance look good in annual and quarterly reports, executives inevitably put offย long-term investments that may seem prohibitively risky.ย
Managerial short-termism can affect operational decisions. In particular, it may lead to underinvestment inย operational capabilities. Indeed, the odds are stacked againstย building operational capacity, since it involves significant financial resources, demand-side risks and a long lead time before seeing results.ย Moreover, sinceย operational decisions regarding capacity tend to be perceived as optimisation problems rather than strategic considerations, the negative impact of short-termism on operational capability and inventory hardly gets the attention it deserves.
Interestingly, a reform has been unfolding in the United States since 1984.ย Corporate constituency statutesย are explicitly allowing corporate office holders and directors to consider the long-term interests of the corporation and the interests of corporate stakeholders, as well as how they are aligned in carrying out their fiduciary duties.
Effectively, the statutes give executives and directors significant flexibility to make decisions in the long-term interest of their company and its expanded range of stakeholders. In other words, it frees them from short-termism.ย
Why long-term matters
From an operations perspective, we are interested in the effect of a long-term view vs. short-term view on capacity investment and its eventual impact on company performance. The staggered adoption of constituency statutes allowed us to study the effect and extent ofย Original Postoms.14067" shape="rect">managerial short-termism on the operational capabilities of companies. ย
We analysed company data across 35 states including Texas, New York,ย Florida, Illinois and Pennsylvania from 1984 to 2007. We found that after the reforms, companies incorporated in constituency statute states increased capacity investment by 15.4 percent and inventory by 5.2 percent more than those not incorporated in constituency statute states.ย
These increases are gradual and persistent over time, suggesting a transformation in operational structure and strategy.ย In addition, we found that companies with a higher level of managerial short-termism, such as those with low institutional ownership, saw bigger increases in operational investment and performance. This confirms the operational benefits of long-termism.ย
Notably, while constituency statutes were intended to offer managerial flexibility and provide legal protection to executives who adopt a long-term approach, our empirical findings suggest that alleviating short-term stock market pressures not only benefited executives, but also potentially shareholders in the long-term. Our analysis shows that companies that are more likely to benefit from higher flexibility performed better.
Planning long-term builds agility and resilience
While investing in operational capabilities is crucial for long-term success, it is easy to forgo projects with big price tags when faced with short-term market pressures, which tend to intensify during crises such as global pandemics and conflicts.
Indeed, when demand for products such as medicines surge during crises (e.g. disasters or pandemics), producers that fail to build operational capacity face considerable supply-side risks due to the lack of operational flexibility. Limited inventory due to underinvestment makes it challenging to meet demand, which ultimatelyย hurt the companyโs bottom line.
More recently, Boeingโs decline is a cautionary tale of underinvestment in operational capabilities. When Covid-19 hit, Boeing reacted to short-term cost-cutting pressures by laying off experienced mechanics with irreplaceable knowledge of building and maintaining airplanes. However, when business rebounded post-pandemic, the aviation giantโs declining operational capabilities resulted in a series of incidents that compromised passenger safety, hurt its reputation and sent its stock price tumbling. Its focus on cost-efficiency in the short run turned out to be far more costly in the long run.
Executives need to be deliberate in incorporating long-term operational decisions in their corporate agendas. Regulations canย alleviate short-term pressure from capital markets to a certain extent. This canย increase managerial long-termism and influence how shareholders view investment time horizon. Following the statutes in the US, the principle ofย enlightened shareholder value was also introduced in the UK through theย Companies Act 2006.ย That said, companies can do their part by getting the buy-in of shareholders to focus on the longer-term.
It’s all about communication
There is no persuasion without communication. In Jeff Bezosโ firstย annual shareholder letter in 1997, he urged shareholders to look past the short-term and support Amazonโs goal of maximising the present value of future cash flows and long-term firm value. In his words: โOur goal remains to continue to solidify and extend our brand and customer base. This requires sustained investment in systems and infrastructure to support outstanding customer convenience, selection, and service while we grow.โ
In addition to letters to shareholders, shareholder meetings and investor calls are opportunities for executives to present and explain operational investment plans.ย For example,ย at anย annual meeting of shareholders, Walmart CEO Doug McMillon shared plans toย invest in omni-channel capabilities and explained howย a seamless shopping experience across in-store, online and mobile devices would create long-term shareholder value. In the words of Walmartโs former CFOย Brett Biggs, โBeing transparent allows [McMillon] to say to investors, โHere is something we plan to do for a period. You might not like the short-term impact, but hereโs why youโll be happy at the other endโ.โ
In addition, press releases, websites and social media are useful channels to shape retail investorsโ attitudes towards operational investments that could create value in the long run. At the same time, whatโs unsaid can be as powerful as the spoken word.ย In 2009, Unileverโs CEO Paul Polman announced that the company would no longer provide earnings guidance and instead, be more longer-term oriented. Companies includingย Coca-Cola, General Electric and Pfizer have similarly removed quarterly earnings guidance to signal their focus on long-term value creation.
For private companies that are not yet affected by stakeholder pressures on operations and performance, an important consideration is whether and when to go public, and if so, what and how to communicate.ย
Revisiting performance metrics and incentives
Like in other enlightened organisations, โlong-term value creationโย was repeatedlyย mentioned inย Walt Disneyโs letters to shareholders in 2022. But the media and entertainment conglomerate went one step further: It removed adjusted EPS as a measure of executivesโ performance. Byย rethinking incentives, Disney tackled the motivational challenges ofย creating long-term shareholder value. Restructuring executive performance metrics has allowed companies to broaden their definition of success and incorporateย environment, social and governance (ESG) goals in executive pay.
Corporate boards can take the lead in this direction when appointing high-level executives. In addition to putting in place incentive plans that reward longer-term performance, explicitly acknowledging the risks of long-term operational investment can give executives the confidence to invest in operational capacity that could generate value in the long run.ย
After all, one ingredient to long-term success is commitment to operational investments, which may involve building operational capacity or more holistically, incorporating sustainability and circularity considerations into operations to meet long-term ESG goals. Importantly, this commitment must go hand in hand with open, timely communication to the relevant stakeholders, especially in turbulent times.
Edited by:
Geraldine EeAbout the author(s)
Luk Van Wassenhove
is an Emeritus Professor of Technology and Operations Management and the Henry Ford Chaired Professor of Manufacturing, Emeritus at INSEAD. He leads the INSEAD Humanitarian Research Group as the academic director.
Karca Aral
is an Assistant Professor of Supply Chain Management at the Whitman School of Management at Syracuse University. She completed her Master and Doctoral degrees in Technology and Management Operations at INSEAD.
Erasmo Giambona
is a Professor of Finance and the Michael J. Falcone Chair in Real Estate at the Whitman School of Management at Syracuse University.ย
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