I am going to share an excerpt from a book I recently read. As you read it, see if it rings any bells or reminds you of anything. For the sake of a little mystery, I’m going to redact some parts. The excerpt goes, “In the [withheld time period], dividend payments fluctuated from year to year, in step with results, but after around [year] dividends were always paid out, even in years of poor performance. It looked as though the shareholders were taking more than their fair share. In years when losses occurred, dividends could be paid only by taking on additional debt. The burden of the debt, which had been minimal in the [time period], continued to increase during the course of the [later time period] … the company continued to pay out dividends, presumably to give the impression that nothing was amiss. Ultimately, in [year], all this led to the [company] being declared bankrupt…”
I don’t know if any part of the excerpt seemed familiar to you, but as I read it, I couldn’t help but be struck by how representative that excerpt was to so many aspects of life today. The short-termism displayed both by the shareholders and the management of that company seems like a regular occurrence today. I don’t know of any studies that have measured this properly, but I do wonder if societal discount rates — a measure of patience and long-termism where higher discount rates for the future mean more short-termism — have been increasing.
Why does this matter? Well, beyond the obvious reason that most things that are “instant” are typically not good for you (think of fast food, for example), patience has also been empirically proven to matter concretely at the macro and micro levels. At the very macro level, a group of economists in a paper titled, “Patience and Comparative Development” find that patience is strongly correlated with per capita income and the accumulation of physical capital, human capital and productivity. Furthermore, these correlations hold across countries, subnational regions and individuals. This makes sense — many key ingredients of economic development require long-term planning, a greater tolerance for the long-term (patience) means that these ingredients may get to be fully cooked as well.
At the micro level, the excerpt describing the behaviour of the firm above is probably relevant to many public-listed firms we see today. Due to quarterly reporting and the rise of short-term traders, firms have an incentive to constantly chase “positive news flow”, sometimes via creative accounting, to ensure that their share prices increase or, at the very least, tread water. But the truth is, many of the things we ask of businesses take longer than a quarter to sort out — for instance, investing in sustainability practices or preparing for climate adaptation cannot be done in a single quarter and require some further investment into the business, but short-term investors or even ostensibly long-term investors seeking dividends may not be super supportive of those longer-term investments. And it isn’t just sustainability; maintaining investments into the core business or preparing for and against disruption also requires reinvestment.
Malaysia, of course, is no stranger to short-termism, particularly in the past five years (five prime ministers in five years is a lot!). Given that political cycles — in Malaysia’s case, electoral cycles are five years, but as we have seen, political cycles can be much shorter than that — are typically shorter than long-term periods required for structural reform, it can be difficult to imagine how a given government or country, anywhere around the world, might implement long-term policies. And, as for Malaysia, given some of the choices we’ve made with regard to issues like Employees Provident Fund withdrawals and things like that, I do worry that we seem to be swinging more towards the short-term side.
And yes, I am sure there are folks reading this now who would say, “This is too idealistic. For the government to have the long-term stability it needs, it needs to take care of the short term as well; hence, populism is sometimes necessary.”
I think that’s fair and I have argued before in this newspaper that it isn’t always easy to balance between the short term and the long term. After all, what is the point of the long term if people don’t survive the short term? But the reality is that we must balance across time horizons. Otherwise, societies will end up behaving like the company in the opening excerpt — constantly seeking short-term gains at whatever cost regardless of company performance, leading to ultimate ruin.
But what can we realistically do? This is a systemic issue after all. Too many of our political and economic incentives are short term in nature. But unless we are willing to take bold steps and go against convention, it is difficult for us to prioritise the long term. The anti-hopping law in politics helps, and more of such institutional reforms would certainly help. In fact, according to economists Stephen Broadberry, John Wallis, Lant Pritchett and Kunal Sen, the best bet a given country can make in terms of increasing its floor of economic growth (that is, reducing periods of shrinking or stagnating growth) is to improve the quality of its political institutions.
On the corporate side, we should also be willing to be unconventional. “Best practice” globally is usually a code for “whatever works best for corporate interests in developed countries”. For instance, with listed companies, we may want to rethink how we do quarterly reporting. Rather than the financials, we can set regulations that companies must prioritise updates on long-term plans as opposed to short-term numbers during these updates. This might give opportunities to investor relations teams to also prepare their narratives better on how their companies need more time for investments into sustainability and innovation to bear fruit, rather than chase quarterly numbers. And, for the record, I am not saying every company should prioritise reinvestments over dividends; certainly, companies in sunset industries should manage for decline, which includes returning cash to shareholders. The danger is when companies in sunrise industries or at least “noon-time” industries get significantly incentivised to do the same.
But, beyond issues of short-termism, it is also true that the Malaysian corporate sector is a genuine cause for concern. Where once the Malaysian market used to represent 30% or so of the Emerging Markets Index, we are now weighted at 1.5%, with our entire market smaller even than individual companies such as TSMC, Tencent and Samsung, among others. The composition of, say, the 20 largest firms aren’t too different from 20 years ago. A dynamic market would see regular changes in that composition. Reviving the market requires corporate activism, both in terms of beta activism (via entities such as the Securities Commission Malaysia and Bursa Malaysia) and alpha activism (via large shareholders). But beta and alpha activism take time; if we just chase short-term dividends and quarterly numbers, we will remain as we are.
To close, I do worry that, as a nation, we are a little too imbalanced on the short-term side of the short-term/long-term seesaw. And this isn’t a new problem. In the excerpt above, the company in question is the Vereenigde Nederlandsche Geoctroyeerde Oostindische Compagnie (VOC), also known as the Dutch East India Company, and the time period was the 18th century. We need to chart a new path for ourselves, and be more proactive in rebalancing towards the long term for a much more sustainable development path.