Short-termism, ROI and Green Economics

From BusinessWeek comes the painful story of an idealist butting heads with resistance and inertia. Nominally it’s a story of Green economics — identifying ways to be profitable while reducing environmental impact.

But it’s also about an emphasis on short-term economics that is not only paralyzing environmental activity, but is harming business and society.

Think of it as the triumph of payback time over ROI analysis.

Auden Schendler is a classic young outdoorsman environmentalist, full of hope that his employer, Aspen Skiing Company, will “get it” regarding his recommendations.

He recommended a $100K project to remodel the oldest lodge; it has a 7-year payback.

Too long, said the company.

OK, then, how about fluorescents in guest rooms—a 2-year payback in eco-friendly savings.

Nope, not warm enough light for guests.

OK then, how about $20K to save $10K per year in the underground garage?

No, we’d rather spend it on amenities guests notice.

It took Schendler two years to overcome resistance to the garage-light replacement, and then only after he secured a $5,000 grant from a local nonprofit. He acknowledges the strangeness of a corporation with annual revenue of about $200 million, according to industry veterans (the company declines to provide a figure), seeking charity to reduce its electricity use. With a hint of sarcasm, he notes: "This is the sort of radical action that’s needed to get people over ROI thresholds."

BW is writing about Green economics. But look at the examples.

What kind of capitalistic enterprise is passing up 50% returns on investment? The answer—a whole lot of them.

Our economy is increasingly governed by the belief that a bird in the hand is worth more than two in the bush—because that two-bird bush could blow up at any time, and besides, you just might find a four-bird bush around the corner.

Look at the forces of short-termism at work:

• The average length of ownership of a stock is down by orders of magnitude from a decade ago;
• mortgages used to be resold once or twice; now they are sliced and diced and repackaged into securities that are themselves sold over and over;
• the growth of private equity is, among other things, a shortening of the time period of evaluating a company’s worth;
• the growth in auto leasing represents a shortened ownership period;
• Real estate is increasingly a short-term investment to be “flipped;”
• Outsourcing reduces the time required to make a switch in organizations;
• Divorce rates, clothing style cycle times and TV show lifespans—all becoming shorter.

A shift toward transactions goes hand in hand with a reduced time perspective. These shifts make for more efficient markets, and reduce transactional costs (though increasing their number). But there’s a big downside: if everyone’s looking for fast hits, then no one’s around to play the long game.

Mathematically, there are three reasons payback analysis is supplanting ROI analysis:

1. Investment “owners” are turning over faster; I want mine now, thank you;
2. Uncertainty feeds the “get rich quick” mentality; why tie your money up because,hey, you never know!
3. Uncertainty also feeds perceived risk. In effect, investments are being assessed at increasing hurdle rates for farther-out timeframes (note to self—or kind reader?—check bond markets for evidence of this)

So we get more of this kind of thinking:

• Why should a private equity firm invest in anything beyond what will increase the return when the company is sold in three years?
• Why should any company invest with a longer timeframe than three years, lest it be taken over by a private equity firm?
• Why should a company invest in employees, since after all they might leave?
• Why should a company invest in customers if the payback takes over a few years?
• Why invest in branding? In training? In anything you can outsource? (And make sure the outsource contract shows a payback of at least two years).

With this kind of thinking endemic, it’s no wonder we’ve got a hard time figuring out how to reform social security, save the environment, deal with immigration, or rebuild falling bridges. It’s just not fast enough to suit us.

Thank goodness Schendler has the optimism of youth. He doesn’t know what he’s up against.


5 replies
  1. Carl Isenburg
    Carl Isenburg says:

    So, what is next?

    • Are we approaching a singularity where economic paralysis results from a complete lack of trust – and an unwillingness to make capital investments?
    • Is this part of a pendulum-swing?  Will savvy investors eventually identify that going against the grain (and demonstrating trust) will result in superior long-term returns?
    • Does this trend plateau at some sort of minimum-trust level?  Do we find a maximum rate of churn and learn to accept it?
  2. Lark
    Lark says:

    I think the problem goes much deeper than this, Charlie. Along with a few man-made laws in need of reform, arriving at workable solutions starts by openly questioning money itself.

    Is this not the coin of the realm with which we all struggle to control? Shouldn’t we demand to get the answers?

    The value of our money is not trustworthy; in fact, today it’s counterfeit. It’s availability, supply and general worth is constantly manipulated by a private central banking cartel that pulls levers of control none of us can see… or foresee – intuitively, rationally, scientifically, or otherwise.

    They’re unaccountable corporations accountable to a select few – most of which are, themselves, corporations… or individuals… desirous of their right to privacy.

    Some have proposed solutions to this dilemma…

    So we sacrifice our best instincts for how the game is to be played… by admitting to ourselves… that we must adopt the monkey see-monkey do attitudes of those who play the game to win – no matter if we consider we’re at war or not – even if justification doesn’t factor in.

    In a world where might makes right, and by adhering willy-nilly to natural economic laws of the jungle, you and I always struggle… just to survive.

    The race is on. Prosperity is on the line for somebody; and, you know, tomorrow might never come.

    Alas, even acknowledging this everlasting legacy of fear, we can only observe truth when it is warranted… perceived… or detected – right?

    But only when we dig deep for the underlying truths about our predicament can we begin to address the problem honestly.

    Solutions will only advance us further… in our evolutionary quest for perfection… when we can begin to trust the value of whatever it is we’re using… as a convenient medium of exchange.

    And we have every reason to believe we can do better. Without sustainability and cooperation – and a vastly improved capacity… to trust that we’re all in this world together… working from the same play-book – we cannot expect that our resources… will outlast… our squandering.

    Personally, I feel we need to thoroughly re-examine our notions about property and privacy rights law… economic and ergonomic values which are more closely aligned with natural or universal law… then accept the Golden Rule as a unifying principle for all of these.

    How would it be if our planet and its people changed for the better… if we accepted the values expressed by the Golden Rule, for instance… might best… also apply… to governing corporate responsibilities, all government accountability, privacy and property rights’ protections… that were enshrined in the law… in ways which were truly transparent for everyone?

    Don’t we have a duty to ourselves and our heirs to demand monetary reform before we can positively address anything else?

    If we ignore this one problem forever, we’ll always live in tyranny; and justice will be rendered meaningless. The "boss" will be coerced to deliver top-down dictates from out-of-touch, invisible "upper bosses" not accountable to bright and caring "underlings" like Auden Shendler – ever.

    Problem is… the values expressed by Mr. Shendler represent the sheer will of rational behavior… and we, the people; whereas the bosses represent the will of the moneyed elites. By being secretive and collusive – intransigent in their thinking or fearful themselves – they heavy-handedly insist on controlling all of us.

    No wonder many of us live in fear of the unknown – we’ve allowed the unthinkable… and unknowable… to rule our behavior!

  3. Jim
    Jim says:

    I’m reading this blog entry while taking a break from reading altenatively reading <I>Wild England</i>, the first post-apocalyptic science fiction novel (~1880); and Frederick Law Olmsted’s 1840 travelog of his journeys through the US slave states.

    In both the narratives, there is a commonality– it is hard to travel because there is so much banditry or ripoffs, and no dedication to a common infrastructure. One of the reasons why business costs in the US are low is that there IS a common infrastructure of trust and travel- you porbably won’t be robbed traveling from LA to SF, most likely, your house will not be looted while you are way for the day.

    The logical endresult of shorter and shorter planning horizons is not a happy one. Perhaps the coming of peak oil, housing price collapse, and a wave of bankruptcies will lead us into either another New Deal, or a breakdown into barbarism.

  4. Alagu Balaraman
    Alagu Balaraman says:

    The scenario you describe is exactly what Alvin Toffler wrote in Future Shock, 1970. He follows the impact of  increasing choice and acceleration of change to come to the conclusions that you have articulated.

    However, he doesn’t suggest how to handle it. Trying to go down the path of argument you have outlined – shortening periods ownership & quicker transactions – we would soon have a near perfect market in ownership. Would that not lead to a stabilization in returns at a low level? At which point, someone will come up with the bright idea of taking a long view to drive up returns. It might be hailed as a dramatic insight and we’ll have new avatars of "In Search of Excellence" and "Good To Great" coming up, but is it a cycle and have there been such cycles in the past?

    Galbraith writes about different bubbles in history in his book "The Great Crash: 1929". Most of those were about increasing the convenience of buying and selling ownership – the South Sea bubble, joint stock companies, the Florida land bubble and 1929 itself.




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