In the article by Graham, Harvey, and Rajgopal (2006), the authors highlight the tendency of chief financial officers (CFOs) to sacrifice shareholder value so that they can meet earnings expectations or smooth reported earnings. These CFOs use "real earnings management" to defer valuable projects or cut research and development budgets to achieve these goals, and these approaches nearly always decrease value (Graham, Harvey, & Rajgopal, 2006, p. 27). The authors term this problem of destroying long-term value to achieve short-term earnings expectations "short-termism," and they detail ways that it can be combated, such as switching from rules-based to principles-based accounting methods and changing from quarterly EPS guidance and reporting to a longer-term view. Overall, they advocate greater reporting integrity and the changes in corporate governance that are needed to support it. One of these necessary changes is to alter the culture of boards of directors so that they too can start focusing on long-term strategic goals. Although the authors emphasize that a focus on the long term does not mean replacing short-term goals completely, since long-term goals are achieved through the accomplishment of several short-term goals, they do advocate a more balanced perspective that does not distort either the figures or the reasons behind decisions.
I agree wholeheartedly with the authors. The push to meet short-term earnings expectations causes CFOs to focus on the short term and sacrifice long-term gains for the short-term appearance of gains. This is like giving away real money for nothing more than a picture of money. To put it another way, it is putting too much emphasis on the way things look rather than caring about the way things really are, and it prompts CFOs to throw away long-term value just so that they can make the organization look good for the short term. It not only shows that CFOs are focusing on th...