Management myopia is the managers’ tendency to obtain short-term gains rather than long-term profits. Most companies have strategic goals in maximizing profit, and managers tend to consider that a higher efficiency consists in offering short-term returns to investors.
Causes for Management Myopia
- One of the main causes is the incentives for managers to grant short-term profit by linking their bonuses to short-term performance, thus making it more attractive for them to make short-term decisions that boost the share price.
- Depending on the type of contract between the manager and the company, incentives may be linked to tenure. If the manager is unlikely to continue in the present organization or industry, they might prefer to invest in projects with lower net present values, but with higher returns in the early years, than projects with higher net present values, but with higher returns in later years. Thus, the duration of the manager’s contract is directly linked to their company strategy, which ultimately affects the company in the long run.
- Also, managers might feel pressure to produce quick results, thus taking strategic short-term decisions, without realizing the losses long term, such as cutting back on discretionary expenditure such as research and development, staff training or marketing campaigns that would lead to a reduction in current profits even though it would enhance long-term value.
- Sometimes, it is simply a manner to respond to the stakeholders’ wishes and perspective, without the managers being able to bring a long-term horizon without risking being replaced.
- The requirement of frequent reporting from the part of the authorities may also result in myopic management since it may lead to a premature evaluation of performance and enhances the managers’ pressure for quick results, especially if the shareholders do not see the results in their broader context.
- Linking management rewards to long-term performance and strategic goals rather than fast achievements.
- Change the shareholders’ mindset by implementing, for example, a loyalty dividend that would be awarded after a certain period of time in order to keep them investing in a long-term strategy.
- Another solution would be to have institutional shareholders more invested in the corporate governance of an investee business and to become more accountable to their principal shareholders as well as the industry as a whole.
- Changes to taxation policy in order to make short-term investing less attractive, for example by introducing or increasing an existing tax on the transfer of shares.