Acton Commentary

The Moral Trappings of the Short Term Fix


A recent issue of Business Week reports that several companies have been cutting jobs recently because, years ago, they relied on short-term forecasts that called for them to hire too many employees too quickly. The result: "Now their entire workforces are paying the price."

The article underscores how business leaders can sometimes make bad decisions, just like other fallen people. The impulse to target the short term in response to both gainful and disappointing events in the market can cause headaches for managers in the long run. Expediency is not always the best policy.

Faced with the pressures of the past year’s lethargic economy, some CEOs may feel the urge to look only toward short-term "quick fixes" to retain investor confidence. There is sound, moral reasoning, however, to recognize that it is sometimes in a company’s best interest to sacrifice short-term profit for long-term gain.

Profit serves as an indicator that a business is functioning well. Profit is the first moral obligation of a company in providing jobs and opportunities for individuals, thereby allowing employees and customers to meet their own responsibilities to their families. The renowned economist Wilhelm Roepke said that profits measure "whether an enterprise is going to be a successful part of the national economic structure or not." A company that makes a profit contributes to the vibrancy of civil society by affording individuals opportunities to contribute to the wealth of their families and communities.

It is a moral goal for CEOs, then, to try to maximize their firms’ profits. But other considerations are important, too. According to the Catechism of the Catholic Church , business leaders have a moral responsibility to pursue profit, and they also "have an obligation to consider the good of persons…" (#2432). Since the good of the employees and society depends, in part, on business success, CEOs need to consider the long-term prosperity of the company throughout the business cycle—even at the possible expense of immediate profits.

None of this is to say that such considerations are simple matters. The pressure from stockholders is to focus on the end of the quarter. Publicly held companies are judged in three-month snapshots by those who own their stocks. CEOs realize that their evaluations as company leaders will depend on short-term performance of stock. This could translate into CEOs shifting funds into stock performance and away from donations to worthy local causes. It could mean reducing the work force as well as a number of employee benefits.

The trouble is that a short-term focus might lead to long-term damage for the profit and reputation of a company. From a broad perspective, a case can be made that CEOs should avoid focusing only on the short term, if the free economy is to realize its full potential. It is not beneficial to corporate leaders, investors, and, especially, workers when CEOs are pushed to come up with reactionary responses to sub-par earnings.

For example, last year General Motors said it would cut 15,000 jobs from its workforce after just two months of lower-than-expected earnings. While this may have resulted in a short-term net gain in retained earnings for GM, what would be the company’s response if the economy continues to pick up (as it is now appearing to do)? Will not increased consumer demand correlate into a higher required output by GM? GM would likely need to spend more on hiring and training costs for the employees it would then require. Would sticking with the employment level before the job cuts have profited GM in the long run? Would company reputation, always important in the free economy, have been enhanced? Of course, such questions are hypothetical, but they do warrant consideration from the business manager who is prudent and future-minded.

Occasionally, however, actions such as job cuts and restructuring are required for long-term growth—no matter how unpopular they are with the public. For a firm to continue providing work for most of its employees and to continue making products for consumers could mean it has to sacrifice some jobs in the present. This is not necessarily an immoral practice as long as it is handled fairly.

It is important to remember that the free economy is, in itself, neither moral nor immoral. The free economy, rather, fully empowers people through free exchange to exercise free will, which is essential to human dignity. Employment quandaries as described above as well as the dot-com fallout of 2000 can result when fallen managers are enticed into disregarding long-term success for short-term gains.

The moral ramifications involved in profit decisions require managers to reconcile the long-term gains of companies with the demands for immediate performance by shareholders. Though shareholders are the legitimate owners of companies (and thus have a right to direct the use of the capital they have invested), they should support CEOs who are future-minded and enact long-term strategies, even if earnings fall short of expected returns in the immediate quarter.

Granted, this is a fine line to walk; failure to address company losses in the present can cripple a business in the future, rendering thousands jobless. That is why firms need qualified CEOs and managers who act prudently when the economy throws them a curveball.

A new organization known as the Center for Entrepreneurial Stewardship (CES) is attempting to address concerns such as these that CEOs commonly face. Dedicated to advancing a new business-ethics model known as entrepreneurial stewardship, the CES encourages and supports morally concerned business leaders in the active integration of their faith with their entrepreneurial calling. The efforts of the CES could have a major impact on how profit decisions are viewed both by the business world and the public.

As we continue our venture into the New Economy, it is important that companies act with fiscal prudence, showcasing how diligent effort and morality can be allied. The Cappadocian monk Basil the Great once argued that earning profit was morally legitimate but that it also required practicing the virtues of generosity and sharing. In today’s business world—which is dynamic and, to a point, unpredictable—prudence and forethought are also necessary. By seeking to secure long-term profits for the good of their companies, CEOs can more adequately represent how the profit motives of their businesses contribute to the betterment of society, thus fulfilling the dominion mandate of Genesis.