It’s easy to take Keynes’ dictum that “in the long run we’re all dead” out of context. When you do, you can come badly unstuck - as the banks and insurance companies are discovering.
In case you’ve ever wondered, economists see the short term as being for a year or two, the medium term as about the next 10 years, and the long term as everything further away than that.
See the point? If the long run is only 10, 15, 20 years from now, you won’t be dead. Nor will most of the people around you at work. The economy will still be alive and kicking in 20 years’ time and, in all probability, so will your company.
In which case, spending too many years making short-sighted decisions could leave you looking pretty bad if you haven’t had the foresight to skip town.
For many years people have bemoaned “short-termism” – the tendency to favour quick results over longer-term consequences. To go for the flashy at the expense of patient investment in future performance. To do things where the benefits are upfront, and the costs much later, even when the initial appearance of success actually worsens the likely outcomes down the track.
Short-termism seems particularly to have infected big business. Listed companies are under considerable pressure to ensure every half-year profit is bigger than the last.
This pressure comes from the sharemarket, from “analysts”, but more particularly from institutional investors – the super funds, banks and insurance companies that manage the savings of ordinary people, invested mainly in company shares.
Although the “instos” don’t actually own many of the shares they control, they represent the shares’ ultimate owners (you and me) by continuously pressuring companies to get higher and higher profits – which will lead to ever-higher share prices.
It’s long been alleged that the short-termism the sharemarket forces on big business – to which companies have responded by trying to align executive pay with profits and the share price – has led firms to underinvest in projects with high risks or long payback periods.
If so, this fits with former senior econocrat Dr Mike Keating’s thesis that the advanced economies’ weak growth in activity, productivity and real wages is explained mainly by a protracted period of weak investment.
But the banking royal commission is a stark reminder to a lot of companies, the sharemarket and shareholders that after years of short-sighted, corner-cutting, even illegal behaviour, the long run has arrived, we’re all still alive and there are bills to be paid.
Those bills will take many forms. It’s likely some of the borderline customer-harming behaviour will become illegal, and so won’t be available to keep profits heading onward and upward every half-year.
Banks and insurance companies found to have mistreated their customers in ways that are outright illegal, will face big bills for restitution.
But probably the biggest bill comes under the heading of “reputational damage”. As Australian Competition and Consumer Commission boss Rod Sims reminded us in a speech, most companies spend much time and money promoting and protecting their “brand”.
A highly-regarded brand is money in the bank to the firm that owns it – as you see just by comparing the prices of branded and unbranded goods on a supermarket shelf. Brands engender trust – that the product is of consistently good quality and will do what it promises to do – and often social status.
But, as Sims says mildly, “bad behaviour by a company can undermine its brand reputation”.
“A key value of the royal commission has been to expose the poor behaviour of financial institutions to public scrutiny. The evidence about the conduct of AMP was particularly damning. The resulting damage to AMP’s brand reputation has been substantial.”
Sure has. And that damage to AMP’s reputation and likely future profitability has seen its share price fall by 35 per cent since its first day in the witness box in April.
Sims says one way to discourage misbehaviour by companies is to “identify and shine a light on bad behaviour”.
“The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours,” he says.
Get it? The regulators are wising up, and in future will do more to name and shame offenders – to diminish brand reputation – so as to discourage short-sighted, take-no-thought-for-the-morrow behaviour. To move firms from the short run to the long run.
So far, the big four banks’ share prices have fallen only a per cent or two since the release of the commission’s interim report. But my guess is they have a lot further to fall once we see the full price they’ll be paying for past short-run profit-maximising behaviour, and how much less scope there’ll be for such behaviour “going forward”.