Short-term managerial thinking has been attacked for damaging business and economic performance as part of a “quarterly results at all cost” mentality. How can companies promote improved, longer-term decision-making by managers to avoid such managerial myopia?
The problem has been highlighted recently by such figures as Bank of England chief economist Andrew Haldane, who rapped companies for allegedly favouring short-term returns to shareholders instead of investing for longer-term benefit, arguing that firms “are almost eating themselves.” The pressure for “financial engineering” to raise returns has reportedly led to reduced U.S. business investment in favour of share buybacks, with U.S. presidential candidate Hilary Clinton blasting a “quarterly capitalism” mentality.
In search of solutions, a recent study conducted for the Chartered Institute of Management Accountants (CIMA) sought to identify when, how and why managers engage in myopic behaviour. The cost can be high, such as when executives avoid making new investments or curb marketing and other spending which might generate long-term value, but at the risk of reducing short-term performance.
According to CIMA’s report, “Incentives, Accountability and Myopic Decision-Making: A Neuroscientific Investigation ,” management accounting tools such as Net Present Value (NPV), Balanced Scorecard (BSC) and Value Based Management (VBM) might actually be worsening the problem, with myopia seen as a behavioural issue rather than simply metric choice.
With pressure from stakeholders driving the need for greater accountability, the lack of success of traditional management accounting methods suggests an alternative approach is needed, CIMA suggests.
Individual biases
CIMA’s study at the University of Ljubljana, Slovenia put 30 accounting and finance managers to the test. Participants underwent vigilance, Eriksen Flanker and emotional capture tasks while their brain activity was monitored by magnetic resonance imaging.
The results revealed that accountability does affect performance, but in differing ways depending on individual biases. Accountability pressure improved the ability to effectively process information and inhibited responses to conflicting stimuli, but had no behavioural effect on the ability to maintain focused attention.
A more detailed analysis showed that “monetary incentive had greater effect on performance of those that are more myopic, while social pressure was more affective for those less myopic,” the report said.
The study concluded that some types of cognitive performance cannot be further improved by accountability, such as for individuals who are already performing at their peak. Employing accountability measures in such cases could lead to wasted mental resources and frustration.
In addition, behavioural performance estimates do not always provide a complete picture. “Additional care needs to be invested into making sure that the performance assessments faithfully reflect invested effort, both to ensure that we are correctly assessing the effectiveness of accountability measures, and that we are fairly rewarding (or punishing) individuals’ performance,” CIMA said.
For management accountants, the task of ensuring incentive schemes and accountability systems constrain managerial myopia rather than reward it will require greater understanding of human behaviour. As economists have also discovered, “irrational” humans do not always behave the way models might predict.
