Short-termism bad for business

Nov 28, 2018 | Emerging business models | 0 comments

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Panera Bread is one of the most successful restaurant chains in the US, after its humble beginnings as a stand-alone Boston cookie shop opened in 1981. Founder Ron Shaich saw an opening in the week-day lunch scene for elevated sandwiches and soups offering a quick healthy meal in a welcoming environment.

In 1991 the company went public, building a chain of restaurants that filled demand for fast-casual dining, and by 2010 Panera was opening a new store every three days. However, the financial crisis made consumers more cautious in their spending. Shaich invested in digital ordering, catering and delivery services and loyalty programs to keep the business growing – which all required significant investment, but eventually paid off.

However, brushes with activist hedge funds who invest in companies and then pressure management to make decisions that drive up stock prices in a matter of months have convinced Shaich the current business environment isn’t amendable to long term transformative investments and sustainable jobs. The fixation on short-term profits is jeopardizing the future of American businesses and adding to social instability, which Shaich believes is contributing to political polarization in the US.  According to Shaich, the resentment at the heart of President Trump’s political base is a direct result of the quick-profits-over-all ethos that dominates economic thinking.

Harvard Business School professors Lynn Paine and Joseph Bower argue the notion that company profit is the be all and end all for company management is a relatively new idea. They trace it to free-market economist Milton Friedman who claimed in the 1970s that corporate social responsibility was akin to pure and unadulterated socialism. However, Paine and Bower argue that this theory is “rife with moral hazard.” Stockholders have no accountability for what the company does, and no responsibility, as management do, to place the company’s interests above their own. The costs of prioritizing shareholders’ interests above all else are borne by the company, and by society, which is deprived of innovation, jobs, and tax revenue.

Shaich, who remains the chair of Panera is trying to change the thinking of business leaders and policy makers. He founded Act III Holdings, an investment fund which offers capital, with fewer time constraints, to entrepreneurs in the restaurant industry. Innovation and productivity increases only come from commitments and transformative projects, but while investing for the future is critical, investors need to be sold a vision. In other sectors such as tech this has been done effectively and convincingly and investors have come along for the ride.