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Milton Friedaman responsible for this really dumb idea?

JP Hochbaum

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Milton Friedman is responsible in this shift of corporate responsibility from long term stability to short term profits.

The Social Responsibility of Business is to Increase its Profits, by Milton Friedman

"Readers of this column know that short-term shareholder value, which is still pervasive in large organizations, has a lot of accomplishments to its credit. It has led to “bad profits” that have destroyed customer loyalty. It is responsible for massive offshoring of manufacturing, thereby destroying major segments of the US economy. And it has even undermined US capacity to compete in international markets.

Now the Financial Times reports that the short-term shareholder value theory has a new feather in its cap: it is responsible for killing the economic recovery that should have occurred after the financial meltdown of 2008."

How The 'World's Dumbest Idea' Killed The US Economic Recovery - Forbes
 

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The wide spread proliferation of mutual funds to the greedy, unclean masses who do not care how the free money comes any more than a CEO is responsible, not Milton Friedman :coffeepap
 

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Seriously? Corporations are the problem? Really?

Here you are critiquing publicly owned corporations because privately owned companies provide more value for customers. Yet, answer me this...who provides more value for customers...corporations or government organizations? Obviously corporations provide infinitely more value for customers...yet where's your critique of government organizations? Do you not realize or comprehend or grasp that nearly half of our nation's resources are allocated by government organizations?

No matter how bad corporations are...they satisfy other people's preferences infinitely more than government organizations. You know why? Because customers and shareholders can always say "no thanks" if they feel that they have not been getting their money's worth. In other words, they have freedom of exit.

Milton Friedman understood this concept more than you ever will. Here's some excerpts from an interview he gave...What Is Greed?

I don't want to make Detroit happy, that's not my aim. I want to make the citizen happy. I want to make the customer happy. The last thing in the world we want to do is to make Detroit happy.
The government should not help to save Chrysler, of course not. This is a private enterprise system. It's often described as a profit system but that's a misleading label. It's a profit and loss system. And the loss part is even more important than the profit because it's what gets rid of badly managed, poorly operated companies. When Chrysler loses money...it's got to do something. When Amtrak loses money it goes to congress and gets a bigger appropriation.
It's the stockholders of Exxon who ultimately are buying it. If they don't like what Exxon is doing with their money, they have a perfectly good alternative...they can sell the stock. And as the stock went down, if the stockholders didn't like it, they would pay somebody to change the policy which Exxon is following. We have a far greater degree of control over what Exxon does than we have over what a lot of our government corporations do.
If you were truly interested in customer satisfaction...aka consumer sovereignty...then you would go after the government rather than corporations. But you're incapable of grasping any of the concepts involved.

This is what consumer sovereignty would look like...

In the private sector, the voluntary sector of the economy, we know that something is "well worth the money" if people are willing to spend their own money on it. In government, politicians work to separate the payment of taxes from the receipt of specific services. We're not asked "will you pay $100 right now for farm subsidies and $4000 for Medicaid and $1600 for the wars in Iraq and Afghanistan and $130 for a new presidential helicopter and … ?" If we did get such a question, we might well decide that lots of government programs were not "well worth the money" to the people who would be paying the money. - David Boaz, Well Worth the Money
So do you truly value consumer sovereignty? Or is this merely yet another attempt to critique economic concepts that are way way way over your head?
 

JP Hochbaum

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Seriously? Corporations are the problem? Really?

Here you are critiquing publicly owned corporations because privately owned companies provide more value for customers. Yet, answer me this...who provides more value for customers...corporations or government organizations?
That's a false dillemma fallacy. No one is saying government > corporations. Just saying the shift from long term strength to short term profiting has made this economy weaker.
 

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Seriously? Corporations are the problem? Really?

Here you are critiquing publicly owned corporations because privately owned companies provide more value for customers. Yet, answer me this...who provides more value for customers...corporations or government organizations? Obviously corporations provide infinitely more value for customers...yet where's your critique of government organizations? Do you not realize or comprehend or grasp that nearly half of our nation's resources are allocated by government organizations?

No matter how bad corporations are...they satisfy other people's preferences infinitely more than government organizations. You know why? Because customers and shareholders can always say "no thanks" if they feel that they have not been getting their money's worth. In other words, they have freedom of exit.

Milton Friedman understood this concept more than you ever will. Here's some excerpts from an interview he gave...What Is Greed?

If you were truly interested in customer satisfaction...aka consumer sovereignty...then you would go after the government rather than corporations. But you're incapable of grasping any of the concepts involved.

This is what consumer sovereignty would look like...



So do you truly value consumer sovereignty? Or is this merely yet another attempt to critique economic concepts that are way way way over your head?
1. Corporations provide value to customers governments provide value to citizens, the difference is customers are valued according to their pocket book, citizens are valued according to their citizenship, i.e. can they vote.

How are half of our nation's resources allocated by government organizations??? What resources are nationalized?

Customers can say "no thanks" for some products, others they cannot, we HAVE to eat, we HAVE to ahve healthcare, we HAVE to have shelter, also only including "customers" in the equasion ignores the externalities ... governments CANNOT do this, they have to take into account ALL costs, not just internalized ones.

Milton said:
The government should not help to save Chrysler, of course not. This is a private enterprise system. It's often described as a profit system but that's a misleading label. It's a profit and loss system. And the loss part is even more important than the profit because it's what gets rid of badly managed, poorly operated companies. When Chrysler loses money...it's got to do something. When Amtrak loses money it goes to congress and gets a bigger appropriation.
When Chrysler looses, it puts as much of the cost as it can on Detroit ... and when it profits it keeps all the profits, so when Chrysler looses, it lays off people (who probably had nothing to do with the failure), makes those who remain work more, breaks unions, and thus reduces tax revenue, overall demand, and puts people on the government dole all detrimental to Detroit, it cuts pollution controls, so it creates more problems for detroit. When it makes profits that money goes to the CEO's in manhatten, and the HQ there.

It's the stockholders of Exxon who ultimately are buying it. If they don't like what Exxon is doing with their money, they have a perfectly good alternative...they can sell the stock. And as the stock went down, if the stockholders didn't like it, they would pay somebody to change the policy which Exxon is following. We have a far greater degree of control over what Exxon does than we have over what a lot of our government corporations do.
Both you and I know that's not how the stockholders work, they buy a stock, wait for it to go up, then sell it, no one looks at the corporate policy because owning a stock doesn't REALLY give you any power, just an opporunity to make a quick buck with the ebb and flows of the market. It's all short term gain, if Exxon enacts a policy that increases revenue in the next year, but down the road might crash the industry or make larger problems, people will buy the stock do get the short term cash and then sell ... it's no longer their problem.

If you were truly interested in customer satisfaction...aka consumer sovereignty...then you would go after the government rather than corporations. But you're incapable of grasping any of the concepts involved.

This is what consumer sovereignty would look like...
Again with your crackpot theory that's already been debunked over and over and over and over again.
 

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That's a false dillemma fallacy. No one is saying government > corporations. Just saying the shift from long term strength to short term profiting has made this economy weaker.
That's because people are free. When faced with the choice, people apparently prefer short-term gain. The notion that this is someone who recognized this behavior's fault, or that it's corporations fault, or CEOs, etc., is absurd. It's even heralded as old fashioned wisdom. A bird in the hand is worth two in the bush. So much for your routine propaganda attacks the cause du jour.
 

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It's an Enron economy
The entire economy and all our corporations that drive our economic prosperity around the world, are all like Enron? That's absurd.

https://en.wikipedia.org/wiki/Enron
Enron's demise occurred after the revelation that much of its profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled). This meant that many of Enron's debts and the losses that it suffered were not reported in its financial statements.
Enron used a variety of deceptive, bewildering, and fraudulent accounting practices and tactics to cover their fraud in reporting Enron’s financial information
Enron was a sham, and it took down to major U.S. corporations entirely (Arthur Andersen, Enron)

Arthur Andersen alone went from 85K employees worldwide, down to 200 who apparently just handle all the law suits against them....

No, the economy is not an Enron economy.
 

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That's because people are free. When faced with the choice, people apparently prefer short-term gain. The notion that this is someone who recognized this behavior's fault, or that it's corporations fault, or CEOs, etc., is absurd. It's even heralded as old fashioned wisdom. A bird in the hand is worth two in the bush. So much for your routine propaganda attacks the cause du jour.
Since this business thinking has come about we have seen a decrease in wages, unions, and more frequent economic crashes. It isn't an attack, it's fact.
 

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Since this business thinking has come about we have seen a decrease in wages, unions, and more frequent economic crashes. It isn't an attack, it's fact.
It's everyday human thinking. Bird in the hand is worth two in the bush. It's been around before big U.S. corporations, and it will likely outlive them. Again, the notion of wanting to earn some scratch when you're younger, vs a long term payoff.. that's our culture (and basic humanity). For me personally, I've almost always taken the long play. And you know what? The long payoff is typically going to be even more lucrative when you're surrounded by people who prefer short-term gain. Take your pick, you're economically free to choose which is best for you...


- A decrease in unions is arguably a great thing.
- A decrease in wages tie that to globalization/free trade, not basic human behavior. Although the idea that you want to inflate labor costs seems silly...we want cheaper goods, not more expensive goods.
-Economic crashes? Welcome to economics 101. Cycles exist. The bigger the economy, the larger potential crash.

Some other countries have a more save-drive people. But then you'll be here complaining that we should be spending not saving- and it's savings that are crippling the economy.
 

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That's because people are free. When faced with the choice, people apparently prefer short-term gain. The notion that this is someone who recognized this behavior's fault, or that it's corporations fault, or CEOs, etc., is absurd. It's even heralded as old fashioned wisdom. A bird in the hand is worth two in the bush. So much for your routine propaganda attacks the cause du jour.
Backwoods riddles aside, people do not prefer short term gain. Otherwise, the system of markets would have failed soon after they were embedded. People generally prefer long-term gain. We are often confronted with the dilemma of a future price higher than both the purchase price and the current price, i.e. people are in the position to take risk. People must believe this (be willing to take on risk) for markets to work. Otherwise animal spirits take hold. Asset price volatility soon follows.

An opinion piece from the Financial Times:

The key to this insight was the role Keynes gave to people’s psychological motivations. These are usually ignored by macroeconomists. Keynes called them animal spirits, and he thought they were especially important in determining people’s willingness to take risks. Businessmen’s calculations, he said, were precarious: “Our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing.” Despite this, people somehow make decisions and act. This “can only be taken as a result of animal spirits”. There is “a spontaneous urge to action”.

 

iliveonramen

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It's actually pretty amazing what short term gain has meant to US companies. For most big companies...primarily service companies (just easier to notice) you see all these major US corporations that grew based on good products and good to decent services, new management comes in and cost cutting is the goal...they make huge money as the company starts serving 60% beef where it use to serve 100% beef. Customers start to realize the product sucks. The cost cutting also occurs in the labor department so service decreases. The CEO that ruined the company but made huge profits in the short term leaves. New guy comes in and has to turn around company so spends money to revers prior CEO's actions...rinse repeat.
 

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people do not prefer short term gain.
vs
JP said:
Milton Friedman is responsible in this shift of corporate responsibility from long term stability to short term profits.
If corporations prefer long term gain and not short term, that refutes the OP, which is sufficient.
Also, with regards to your animal spirits quote (I thought you fled the backwoods) I also do not believe the average businessman or woman, with money to risk, calculates economic choices the same as someone who is not a business person, with little to risk. To expand that small subgroup to be representative of everyone seems silly.
 

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. The CEO that ruined the company but made huge profits in the short term leaves. New guy comes in and has to turn around company so spends money to revers prior CEO's actions...rinse repeat.
Are you suggesting that the corporate board and execs intentionally hire a CEO who will pad his own pockets, diminish the company, then leave? And that they intentionally alternate hiring that type of person, and then hire someone who will NOT do those things, to repair the damage? That makes no sense. When a new CEO is called in to fix a company, it is understood that they will make significant changes. They MUST make significant changes, because if they did not believe changes needed to be made to a company that is not headed where the board/etc. wants it, they would be deemed a problem, not the solution. Yes, it's a huge experiment and risk to fix an already struggling company. This is why any CEO worth that position, ensures that even if the experiment fails, they do not carry that burden entirely. In every case I would assume they CEO would earn MORE if the company turns it around, and they earn LESS if it doesn't. That it's always positive is NOT some big mysterious money grabbing issue. It's common sense. If you work retail do you think you should get zero dollars if sales don't increase under your watch? No, you get any compensation that was agreed on (Typically salary and benefits), so do they.
 

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Are you suggesting that the corporate board and execs intentionally hire a CEO who will pad his own pockets, diminish the company, then leave? And that they intentionally alternate hiring that type of person, and then hire someone who will NOT do those things, to repair the damage? That makes no sense...
It doesn't make any sense, but it often seems to be like that.

I think that cronyism plays a big part in the selection and compensation package for a lot of big time CEO's. Otherwise, it is pretty much inexplicable raises and bonuses would be given to a CEO who is driving a company into the ground. And this isn't an uncommon situation. There's one CEO, cant recall his name (he was CEO of either Lows or Home Depot for a couple of years), but he went from corporation to corporation ruining their profitability, yet somehow he was able to keep getting CEO jobs at multimillion dollar compensation packages.
 

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The typical false dichotomy.

If corporations prefer long term gain and not short term, that refutes the OP, which is sufficient.
It is not a black and white interpretation. Further observation of sales and input data is required, e.g. equity valuation, earnings, revenue, costs, etc...

Also, with regards to your animal spirits quote (I thought you fled the backwoods) I also do not believe the average businessman or woman, with money to risk, calculates economic choices the same as someone who is not a business person, with little to risk. To expand that small subgroup to be representative of everyone seems silly.
As always, you decide to take a point and run in the opposite direction. This is likely due to not understanding the point in and of itself. Our economy can/could persevere through a handful of firms downsizing. When the majority of firms are in a defensive mode, a.k.a. preferring short term profitability to protect share price, unemployment increases and an economic downturn soon follows.

Maybe JP should have spelled it out better in the OP?
 

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Are you suggesting that the corporate board and execs intentionally hire a CEO who will pad his own pockets, diminish the company, then leave? And that they intentionally alternate hiring that type of person, and then hire someone who will NOT do those things, to repair the damage? That makes no sense. When a new CEO is called in to fix a company, it is understood that they will make significant changes. They MUST make significant changes, because if they did not believe changes needed to be made to a company that is not headed where the board/etc. wants it, they would be deemed a problem, not the solution. Yes, it's a huge experiment and risk to fix an already struggling company. This is why any CEO worth that position, ensures that even if the experiment fails, they do not carry that burden entirely. In every case I would assume they CEO would earn MORE if the company turns it around, and they earn LESS if it doesn't. That it's always positive is NOT some big mysterious money grabbing issue. It's common sense. If you work retail do you think you should get zero dollars if sales don't increase under your watch? No, you get any compensation that was agreed on (Typically salary and benefits), so do they.
No...I'm suggesting that the focus on short term gains and short term profits has that result.

First of all you seem to suggest that shareholders and large shareholders are with a company for long periods of time. In some cases that may be true...a large sharholder that created the company may have a large stake but after company has been around for generations it's usually not the case.

So this idea that shareholders are in away married to the long term success of a large corporation is just false. If I can make higher than expected profits at one company I'll receive those higher than expected profits than go somewhere else when those profits falter.

Basically though...if you have a large share of a market whats the biggest/easiest way to increase profits? Cost cutting. I imagine a CEO walks to the board and says that there's a lot of potential to increase profit margin through cutting cost. So he cuts labor, cuts expenses and profit margins are higher and profits are increasing at a large rate and those profits are sent out as dividends. After years that company starts losing profit share. The CEO leaves beforehand...shareholders start leaving as profits decrease and dividends aren't as high.

The board...(let's say new board that represents new shareholders) hires a new CEO that says "the best way to increase profits is to increase our market share". So he increases quality, profit margin decreases but he increases market share and profits are increasing.

It's not hard to envision how a short term focus can create that cycle that we see in lots of large scale corporations that have been around for awhile.

This is the problem with the short term focus...the folks that are in charge are not long term stakeholders. Owners of capital can sell and move somewhere else over night. This isn't a problem that came out of no where...it's been pointed to as a problem of Corporations for centuries.

Edit: I also want to point out...this isn't a mystery...why do you think stock price increases when a CEO talks about reducing labor and reducing costs for a big company? People know you can milk that customer base a few years before they leave.
 
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The entire economy and all our corporations that drive our economic prosperity around the world, are all like Enron? That's absurd.

https://en.wikipedia.org/wiki/Enron


Enron was a sham, and it took down to major U.S. corporations entirely (Arthur Andersen, Enron)

Arthur Andersen alone went from 85K employees worldwide, down to 200 who apparently just handle all the law suits against them....

No, the economy is not an Enron economy.
I was referring to Enron's focus on pumping up its share price for short term gain at the expense of long term, sustainable growth, not necessarily its illegal practices.
 

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I was referring to Enron's focus on pumping up its share price for short term gain at the expense of long term, sustainable growth, not necessarily its illegal practices.
That is his debate method. Habitual use of slippery slopes and false dichotomies.

The inability to grasp the notion that corporations will not engage in mass hiring when profit margins are still so healthy is a right-of-center phenomena.
 

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Milton Friedman is responsible in this shift of corporate responsibility from long term stability to short term profits.

The Social Responsibility of Business is to Increase its Profits, by Milton Friedman

"Readers of this column know that short-term shareholder value, which is still pervasive in large organizations, has a lot of accomplishments to its credit. It has led to “bad profits” that have destroyed customer loyalty. It is responsible for massive offshoring of manufacturing, thereby destroying major segments of the US economy. And it has even undermined US capacity to compete in international markets.

Now the Financial Times reports that the short-term shareholder value theory has a new feather in its cap: it is responsible for killing the economic recovery that should have occurred after the financial meltdown of 2008."

How The 'World's Dumbest Idea' Killed The US Economic Recovery - Forbes
Mark to market accounting is also pretty terrible.
 

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When the majority of firms are in a defensive mode, a.k.a. preferring short term profitability to protect share price,
vs
kushinator said:
People generally prefer long-term gain.
Clearly you write above that people generally prefer long-term gain. You then immediately reply with claiming the majority of firms (composed presumably of people, the same business people you quoted in the op-ed) prefer short term profitability. You can certainly clarify that seeming contradiction.

As to your notion that business would do better to not be defensive during a big economic shift, who is debating that? It's not even really up for debate, it's largely described mathematically in game theory.
wiki said:
The prisoner's dilemma is a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so.
The unfortunate fact is that JP is huffing and puffing in the OP about how it's all Milton's fault. Meanwhile, everyone who knows the underlying reasons (above), knows that this applies to nearly any human system as describe in any number ways, but most clearly in game theory. So it goes right back to what you want to do with that knowledge. You can remove economic freedom from business and force them to cooperate for the greater good (including their profits) during a crisis, or you afford them their freedom, and deal with the fact that the non-cooperation is not ideally efficient from the macro perspective. Where do you err, in removing economic freedom to increase profit, or allowing freedom and we suffer worse economic downturns. Not only that, but you'd also have to ensure cooperation and ensure the outcome, otherwise it still would have been better to betray (short-term).
 

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Clearly you write above that people generally prefer long-term gain. You then immediately reply with claiming the majority of firms (composed presumably of people, the same business people you quoted in the op-ed) prefer short term profitability. You can certainly clarify that seeming contradiction.
Error in reading comprehension on your behalf.

When the majority of firms are in a defensive mode.... economic downturns and job destruction result.
 
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...why do you think stock price increases when a CEO talks about reducing labor and reducing costs for a big company? People know you can milk that customer base a few years before they leave.
You're just putting your own outside bias on this. Surely you're aware that labor costs are one of the biggest costs for the typical corporation, so you're what...trying to claim that because that's also one of the best ways to reduce cost, it's therefore some greedy culture of short-term nonsense? No, it's one of the top, if not the top, cost. It's THEREFORE one of the top, if not the top, ways to reduce costs. These days that's typically done with offshoring and technology.

What this boils down to is you don't like how people who own things, use those things. OK. But do you think your opinion should trump theirs? How fascist. I don't necessarily disagree, I disagree with most people's way of life, what they spend their money on, etc. Doesn't mean I want to take away their choice to spend money though!

It's certainly possible that in some cases, starting and selling 3 companies in a row over 20 years, may result in longer-term gain, then in trying to take that first company through 20 years and reach the same profitability.

Do you consider buying/selling those 3 companies in a 20 year period, only about the short-term profit, when clearly it delivered the greater long-term profit? What perspective are you using to judge that?

Just as if you hold an index fund of stocks. You hold that index long-term, and expect to gain more long-term than gamble on short-term market volatility. But the composition of that index fund does indeed change. Is it short-term or long term? Depends on the context.
 

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You're just putting your own outside bias on this.
Actually I'm not. You took the last sentence that was written from a short term investors prospective and used it to create some straw man caricature of the rest of my post. It actually had no bias at all...it was based on the fact that you can reduce a products quality and service over time without a huge loss of market share. People are loyal to their brands. I'll respond even though your post is filled with things I didn't say based on things you seem to of been pulled out of thin air.

Surely you're aware that labor costs are one of the biggest costs for the typical corporation, so you're what...trying to claim that because that's also one of the best ways to reduce cost, it's therefore some greedy culture of short-term nonsense? No, it's one of the top, if not the top, cost. It's THEREFORE one of the top, if not the top, ways to reduce costs. These days that's typically done with offshoring and technology.
Not sure how this refutes what I posted. Of course labor is a large cost. If you're cutting cost then of course you go after your largest cost. I'm not sure how that in any way is counter to the idea that companies with a large market share will typically look to cost cutting in order to continue increasing profits.

What this boils down to is you don't like how people who own things, use those things. OK. But do you think your opinion should trump theirs? How fascist. I don't necessarily disagree, I disagree with most people's way of life, what they spend their money on, etc. Doesn't mean I want to take away their choice to spend money though!
Not sure where this comes from...I guess your telepathic abilities helped you determine all of this.

It's certainly possible that in some cases, starting and selling 3 companies in a row over 20 years, may result in longer-term gain, then in trying to take that first company through 20 years and reach the same profitability.
Do you consider buying/selling those 3 companies in a 20 year period, only about the short-term profit, when clearly it delivered the greater long-term profit? What perspective are you using to judge that?
Ummm...not sure what your point is here. My point was that investors only care what is occurring and what they are receiving while they own shares of that corporation. Sure there's always that possibility...but if you're investing short term you typically forgo long term commitments that would cost money. An interesting study was done that looked at publicly traded corporations and compared them to private corporations. It found that as public corporations were sitting on cash and bringing in huge profits private corporations were doing what you generally should be doing...re-investing in your company. A lot of the public companies were buying back stock or sending out dividends.

Based on that information which do you think of the two are more concerned with the long term?
 
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