One of the longstanding criticisms of American business is that its executives are hostages to “quarterly capitalism,” that they suffer from an excessively short-term orientation driven by compensation structures tied to quarterly profit statements. As Tyler Cowen argues in his new book, Big Business: A Love Letter to an American Anti-Hero (official date of publication tomorrow; I will have a review in an upcoming issue of National Review), there is not a great deal of evidence for that claim. On the contrary, many businesses have suffered from excessively long-term orientations, for instance by making big bets on China or tech startups without sufficient attention to near-term profitability.
I thought of that this morning when reading this very good Wall Street Journal report about an interesting development in the oil and gas industry: Smaller producers have been optimizing their wells for short-term production, which leads to fast growth but makes them heavily dependent on new capital to fund new wells—which may not be immediately forthcoming. The bigger players—Chevron, Exxon, etc.—have been taking the opposite approach, optimizing their operations for long-term production.
“You don’t try to grow production fast,” Chevron CEO Mike Wirth told the Journal. “You really look at the entire life cycle of the asset.”
Chevron has been through a lot of energy-market cycles, and it expects to be around through many more of them. Exxon, too: With a market capitalization of about $350 billion, it is at the moment the tenth-largest publicly traded company in the world. Big multinationals such as Chevron and Exxon have a lot of capital and many different revenue streams, which makes it easier for them to invest for the long-term.
I am agnostic about which is the better strategy, or about what the optimal mix of short- and long-term well-configurations is. (I do not think those things are actually knowable.) But it is worth keeping in mind that if you think there is too much short-term thinking in business, then you should also think that there is great value in having around a lot of companies of the kind that can more readily invest in long-term projects, i.e. the hated big multinational corporations.