Wall Street’s Leadership Crisis

When Congress and the regulators begin their hunt for villains in the financial crisis, they would be wise to look [...]

January 29 2009 by Gary Burnison


When Congress and the regulators begin their hunt for villains in the financial crisis, they would be wise to look beyond people. Structural issues, like the 90-day financial reporting and guidance cycle, should receive their share of attention and blame. Requiring quarterly reporting puts CEOs under constant pressure from Wall Street to think, act and invest for the short term.

Pressure for short-term earnings has been a hidden but decisive force in the financial sectors’ decision to take on more leverage and more risk. Fund managers took on leverage to boost short-term gains in their portfolio. For some funds, short-term pressures meant they borrowed as much as $50 (in a few cases much more) for each $1 of the fund’s own capital. With leverage ratios of 50-to-1, it only takes a decline of 2 percent in the underlying value of the asset, such as a mortgage- backed security, to lose 100 percent of that investment. No wonder Wall Street suffered panic selling as debt-laden professionals struggled to unwind their leveraged positions.

For industrial and non-financial companies, quarterly reporting creates a tyranny of its own. A dip in short-term earnings due to a vital, long-term investment is often seen as a bad decision if it negatively impacts quarterly results. Never mind that many industries are now suffering because they lacked long-term investment in new technologies and systems.

Business leaders have protested the 90-day reporting cycle for years, mostly without success. In 2006, the CFA Institute’s Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics issued a series of studies that argued persuasively that quarterly reporting encourages short-term thinking while destroying long-term value.

“Short-termism” has always been an American disease. Other countries, notably in Europe and Asia, report results to shareholders less frequently, enabling companies to pursue longer term strategies. Some companies, such as German automaker Porsche, A.G., have chosen not to list themselves in New York to avoid short-term pressures.

In the U.S., short-termism is accentuated by a tendency to link short-term results to executive pay. This creates an environment in which short-term thinking becomes a structural component of how business is conducted.

Most employees working in companies acknowledge the need for long-term thinking. They want to know where their company is headed and what they can do to help it get there. Yet, the push for short-term results is a powerful determinant of behavior.

At my own public company, I have never been asked by an investor to define my five-year plan. But this is usually the first question I am asked by people working—or seeking to work— in our firm and by companies wanting to do business with us. To me this signifies a disconnect between our businesses and the markets.

It’s no secret that savvy, highly leveraged traders can make a lot of money buying and selling over the short term. It’s also no secret that financial players can lose a lot of money, which many just did. Non-financial companies, however, understand real value is created over time.

When the financial markets were first conceived, their role was to provide capital to non-financial companies in return for profits and the ability to dilute risk. But in today’s environment, financial firms do exactly the opposite. They concentrate risks, driving short-term behaviors and penalizing companies that plan for the future.

If there is a villain at the heart of the current crisis, it’s quarterly results. As regulators and Congress look at what went wrong with the markets, the place to start is with practices that make businesses think short term.


Gary Burnison is chief executive officer of Korn/Ferry International.