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Long term can become a crutch
The crutch problem
Permanent capital has a downside. It can make people a little more complacent about the long term, and when people claim they can make long-term decisions that others can't, what usually follows is some form of excuse.
The 10-year rate is just a series of shorter rates that build up to it, and the long term is likewise constructed of a bunch of short terms. Both truths have to be held at once. Focusing on the long term is really valuable, but if it becomes a crutch that explains why things are inconsistent or not going the way they should, it is an impediment.
Calendars and targets
Every business works on an annual calendar, and some on quarterly ones. A business is not a one-year business, and anything can happen in a one-year window, yet the one-year result matters to stakeholders. One way to handle it is to watch the calendar year while setting three-to-five-year targets and putting more people on the hook for those than for the one-year number.
A business that rides out those waves needs transparency from all its stakeholders. If the business is opaque, not understood, and volatile, it will not be supported through difficult times. Transparency is what allows autonomy: no transparency, no autonomy.
Why is the long term built from short terms?
Under the expectations theory of interest rates, a ten-year rate roughly reflects the average of the short-term rates expected over those ten years, plus a premium for the added risk. Each year of the long period has to be lived through as a short period first. A business works the same way: a decade of results is the sum of ten separate years. Any shortfall in the early years has to be made up later or it stays in the total.
Why do public companies report every quarter?
The US Securities and Exchange Commission began requiring quarterly reports from public companies in 1970, after an earlier period of semiannual reporting. The reports are filed on a form called the 10-Q. Investors use them to compare results across companies on the same schedule. Many other countries use a different rhythm, such as reporting every six months.
How does transparency make autonomy possible?
Economists Michael Jensen and William Meckling described the problem in 1976: owners hire managers but cannot see everything the managers do. To protect themselves, owners add monitoring, controls, and approvals. The more information managers share on their own, the lower the cost of monitoring, and the more freedom owners can allow. This is a core idea in the study of principal-agent relationships.
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