1.

“The objective of all businesses should be to make as much profit in the short run as
possible”… To what extent do you agree with this statement? (25)

Short-termism is when a business prioritizes short-term rather than long-term performance.

While this may be very profitable for the business, it is most of the time a poor strategy
which can often have downsides effects on the business in the long-run.

Generally, firms with a short-termism view, such as the oil and energy companies
mentioned above, give up profitable long-term investments to increase the short-term stock
price, they put a lot of emphasizes on growing their share price as quickly as possible,
maximizing their return on capital employed and are preoccupied with lowering their unit
costs and increasing productivity. These bonuses based on short-term objectives seem often
to weight more importance than the actual future of the business. Where high dividend
payments prioritize over reinvesting profits. So did the British Gas company in order to
maximize profits, as the price of energy was massively increasing.

However, by focusing too much on short-term measures the business tends to miss out on
some danger. For instance, the lack of investment in long term innovation to secure that
flow of new product ideas and the little attention to customer experience and quality of
goods and services might damage in the long run not only the business market share but
also its brand reputation. For example, oil or gas exploration companies such as British Gas,
have prioritized paying dividends to their shareholders to maximize profits over their brand
image and social responsibilities. As energy bills were soaring, people were experiencing
lower living standards and struggling to pay their energy bills, these companies have done
nothing about it and only increasing their profits and continued paying their shareholders.

The concern about the volume of shareholder payouts appears to be based on an

assumption that there is no economic benefit to paying shareholders. But net shareholder
payouts from public companies do not all disappear down the economic drain. As Centrica
chief executive Chris O'Shea argued, these payouts go also in “pension funds and
investment funds that normal households have saved in", or it could be recycled to provide
capital for private firms, which employ most of the nation’s workforce and are responsible
for a considerable amount of innovation and dynamism in the economy.

In terms of the firm’s future, some firms can be very critical of the short-termism view, as
firms lack the long-term perspective. That’s where the outperformance of long-term
companies are often greater when measured in terms of economic profit, which
incorporates the opportunity cost of a company's invested capital to measure how effective
firms are at using their capital to grow their businesses. This means that the higher revenue
and earnings exhibited by long-term firms is due to smart investment , long-run strategies,
something that did not materialize overnight. Although long-term firms had higher average
economic profit growth over the whole sample, the gap widened over time as long-term
plans came to fruition.
To conclude, opportunities or market pressures can lead managers to take actions that are
designed to go for immediate profits but come at the expense of long-term value. Even
though the economy might benefit to a certain extent from short-termism , overall, there is
not enough evidence to show why prioritizing short-term profits outweighs the long term
ones.