Short-Termism Runs Deep  7
As a result of their focus on short-term EPS, major companies often pass 
up long-term value-creating opportunities. For example, a relatively new 
CFO of one very large company has instituted a standing rule: every busi-
ness unit is expected to increase its profits faster than its revenues, every 
year. Some of the units currently have profit margins above 30 percent and 
returns on capital of 50 percent or more. That’s a terrific outcome if your 
horizon is the next annual report. But for units to meet that performance 
bar right now, they are forgoing growth opportunities that have 25 percent 
profit margins in the years to come. Nor is this an isolated case. In a survey 
of 400 chief financial officers, two Duke University professors found that 
fully 80 percent of the CFOs said they would reduce discretionary spending 
on potentially value-creating activities such as marketing and R&D in order 
to meet their short-term earnings targets.10 In addition, 39 percent said they 
would give discounts to customers to make purchases this quarter rather 
than next, in order to hit quarterly EPS targets. That’s no way to run a rail-
road—or any other business.
As an illustration of how executives get caught up in a short-term EPS 
focus, consider our experience with companies analyzing a prospective ac-
quisition. The most frequent question managers ask is whether the transaction 
will dilute EPS over the first year or two. Given the popularity of EPS as a 
yardstick for company decisions, you might think that a predicted improve-
ment in EPS would be an important indication of an acquisition’s potential to 
create value. However, there is no empirical evidence linking increased EPS 
with the value created by a transaction.11 Deals that strengthen EPS and deals 
that dilute EPS are equally likely to create or destroy value.
If such fallacies have no impact on value, why do they prevail? The impe-
tus for a short-term view varies. Some executives argue that investors won’t 
let them focus on the long term; others fault the rise of activist shareholders 
in particular. Yet our research shows that even if short-term investors cause 
day-to-day fluctuations in a company’s share price and dominate quarterly 
earnings calls, longer-term investors are the ones who align market prices 
with intrinsic value.12 Moreover, the evidence shows that, on average, activist 
investors strengthen the long-term health of the companies they pursue—for 
example, challenging existing compensation structures that encourage short-
termism.13 Instead, we often find that executives themselves or their boards 
are the source of short-termism. In one relatively recent survey of more than 
1,000 executives and board members, most cited their own executive teams 
11 R. Dobbs, B. Nand, and W. Rehm, “Merger Valuation: Time to Jettison EPS,” McKinsey Quarterly 
(March 2005), www.mckinsey.com.
12 Palter et al., “Communicating with the Right Investors.”
13 J. Cyriac, R. De Backer, and J. Sanders, “Preparing for Bigger, Bolder Shareholder Activists,” McKinsey 
on Finance (March 2014), www.mckinsey.com.
10 J. R. Graham, C. R. Harvey, and S. Rajgopal, “Value Destruction and Financial Reporting Decisions,” 
Financial Analysts Journal 62, no. 6 (2006): 27–39.