Professor Rappaport does a commendable job highlighting the common thread of many of the current deficiencies in our capitalist system: pervasive short-termism.
[amazon_link id="0071736360" target="_blank" container="" container_class="" ][/amazon_link]In “Saving Capitalism from Short-Termism” the author neatly threads the likely source of short-termism in capitalism today: the principal-agent problem and misaligned incentives. In short, we have become a society where corporate managers are hired to run businesses on behalf of shareholders who themselves are investment managers hired to run portfolios often hired by advisors or boards who themselves are agents entrusted to manage someone else’s money. Importantly, results in each area are measured by a set of accounting rules which often incentivize managers towards further favoring short-term decisions. Each of these agents is operating under a set of incentives that are often (and at best) misaligned and sometimes misappropriated.
As an investor, I particularly enjoyed the chapter pointing out the benefits of determining what expectations are priced into stocks (based on the estimating the present value of future cash flows), and making decisions based on a company’s likelihood of meeting or exceeding those expectations. [amazon_link id="159139127X" target="_blank" container="" container_class="" ][/amazon_link] Rappaport co-authored another book with one of my favorite investment thinkers, Michael Mauboussin, on the the same topic. However, I would have like to see a more lengthy discussion of other ways in which short-termism is reinforced in the investment management business, including Maverick Risk and the undesired side effects of many of the core principles of modern portfolio theory.
Rappaport takes the reader through each of the players highlighting the presence of short-termism driving decisions large and small and making some useful suggestions on ways each can change the incentives at play in order to re-orient decisions towards favorable long-term outcomes. Readers from all walks of business and life will find these suggestions thought provoking. The concept of customer equity was new to me and a compelling way for business managers to shift their thinking.
I received a copy of this book because I asked for it.