How Short-Termism Invites Corruption…And What to Do About it

37 Pages Posted: 26 Apr 2012 Last revised: 25 Jul 2012

Malcolm S. Salter

HBS Negotiations, Organizations and Markets Unit

Date Written: April 12, 2012

Abstract

Researchers and business leaders have long decried short-termism: the excessive focus of executives of publicly traded companies - along with fund managers and other investors - on short-term results. The central concern is that short-termism discourages long-term investments, threatening the performance of both individual firms and the U.S. economy.

I argue that short-termism also invites institutional corruption. I define that as institutionally supported behavior that - while not necessarily unlawful - undermines a company’s legitimate processes and core values, weakening its capacity to achieve espoused goals and eroding public trust. In the private sector, institutional corruption typically entails gaming society’s laws and regulations, tolerating conflicts of interest, persistently violating accepted norms of fairness, and pursuing various forms of cronyism.

The gaming of Securities and Exchange Commission rules by Citigroup’s mortgage-banking desk in 2007 is an illuminating example of institutional corruption in the finance industry. After exploring that case, I provide a more complete definition of gaming, and explain how short-termism invites the kind of gaming and institutional corruption that occurred at Citigroup. I then examine the key drivers of short-termism in contemporary business, and their potential effects on the behavior of both executives and their organizations.

I conclude by proposing mechanisms to deter the corrupting effects of short-termism, including changes in both business and public policy. While business leaders and policymakers have been cautious in implementing many of these countermeasures, we must seriously consider them if want to rein in the public and private costs of institutional corruption in the private sector.

Suggested Citation

Salter, Malcolm S., How Short-Termism Invites Corruption…And What to Do About it (April 12, 2012). Harvard Business School Research Paper No. 12-094; Harvard Business School General Management Unit Working Paper No. 12-094; Harvard Business School NOM Unit Working Paper No. 12-094. Available at SSRN: https://ssrn.com/abstract=2045522 or http://dx.doi.org/10.2139/ssrn.2045522

Malcolm S. Salter (Contact Author)

HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6623 (Phone)
617-354-8465 (Fax)

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