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Is Musk right that public companies are forced to focus on the short-term?

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Is Elon Musk right to say that public companies are forced to focus on short-term gains?

Elon Musk divides opinion: fast cars and a grand vision attracts an enthusiastic fan club, while his critics worry about short-term finances.

As Tesla is unprofitable, Musk has to play to both galleries. Its no wonder hes under pressure – all public companies feel compelled to focus on easy wins, and all eventually succumb. Management teams are human and, like everyone, prefer plaudits to brickbats.

The problems arise when the pursuit of short-term gains damages long-term prospects. It might seem profitable to pick up pennies in front of a steamroller, but we can all see where this eventually goes wrong.

Take Kodak. It invented the digital camera but missed the long-term opportunities by allowing others to develop it, responding to the subsequent threat in the immediate term by increasing the price of its highly profitable film. It didnt work for long.

Ironically, the companies that have the best opportunity to focus on strong long-term returns are those where expectations are low, as management teams can afford to be candid.

Read more: Tesla loses headwind as analysts cast doubt on going private

James Jarvis, corporate governance analyst at the Institute of Directors, says NO.

Certainly, short-term pressures are a significant feature of equity markets, and public companies have to contend with them to a greater extent than their privately held counterparts. This focus is often evident in the incentive structures for executives and in the (thankfully declining) trend for quarterly reporting, and theres merit in considering how the corporate environment could be more conducive to long-term thinking.

Despite this, companies that are able to present a convincing narrative of long-term, sustainable growth can coax investors to look beyond immediate gains.

Several large investors, such as Blackrock and Legal & General, are making the right noises in regards to being in it for the long haul. Meanwhile, the UKs new Corporate Governance Code lists promoting “long-term sustainable success” at the top of the boards responsibilities.

While investors have different motives, and some are undoubtedly only interested in the short-term, its important to remember that shareholder engagement is in essence a good thing.

Read more: The world could do with more visionaries like Elon Musk

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