Earlier this month, a group of 28 big names from the business, legal, academic, and nonprofit world put out a paper called “Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management.” Among the signatories, all of whom are members of The Aspen Institute’s Business & Society Program, are heavyweights like John Bogle of Vanguard; Warren Buffett of Berkshire Hathaway; Louis Gerstner Jr., formerly of IBM; and James Wolfensohn of the World Bank Group.

Short-termism “refers to the excessive focus of some corporate leaders, investors, and analysts on short-term earnings guidance, coupled with a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation,” according to the CFA Institute.

According to the paper, short-termism has contributed to an erosion of faith in business and in the free enterprise system itself. Influential shareholders, such as money managers and hedge fund managers, who focus on short-term gain have little reason to promote strategies that companies need to undertake to sustain their performance over the long term. The result? High-risk strategies that generate quick profits but leave businesses vulnerable to shifts in their marketplace and the business environment.

To be sure, investors aren’t the only ones at fault. Corporate executives and boards of directors that sign up for incentive packages that favor short-term results with little regard to longer-term performance also share some of the blame. In fact, it appears that an even greater number of companies are doing just that. Over the past year, a majority of executive incentive plans changed to include “a shift away from long-term incentives to include more focus on short-term incentive plans,” according to a recent study by James F. Reda & Associates, LLC. The company reviewed the 2009 proxy statements of 200 of the largest companies in the S&P 500.

The signatories to “Overcoming Short-Termism” offer three recommendations. One is changing the tax code to encourage patient capital. One way is to set the tax rate for capital gains according to a descending scale based on the number of years an entity or individual has held the security.

The next recommendation is to better align the interests of financial intermediaries and investors. This could be accomplished through more thorough disclosures of the compensation, incentives, and trading policies of financial intermediaries, including fund managers and investment advisors.

Finally, the signatories advocate strengthening investor disclosures. For instance, activist investors who gain voting power while also shorting a company’s shares – which could lead them to push for actions that would cause the stock price to fall – would have to make all their positions known.

When it comes to changing corporate behavior, however, at least one observer sees the current behavior of corporate chieftains as rational. The Inoculated Investor – actually, Ben, an equity research analyst in New York – writing in Seeking Alpha, while not condoning the current focus on the short term, says that it’s rational. That’s because given the uncertainties in the current economy, such as impending inflation and the sinking dollar, along with stagnant consumer spending and balance sheets that are top-heavy with debt, corporate execs are wise to, as it were, take the money and run. “If you aren’t sure your business will be viable in the new normal, you have all the incentive in the world to take as much cash out now [as you can],” he writes.

Well, wait a minute. Granted, no corporate exec can control even a single element of the larger economy, whether that’s inflation, government policy, credit availability, or consumer spending. But is that an excuse to throw up one’s hands and do nothing? Presumably, executives got to the corner office by effectively shaping their own firm’s strategies and actions. If customers don’t like or can’t afford their current offerings, management can lead a charge to develop new ones. Ford, for instance, has gained market share in 10 of the last 11 months as a result of new products, as this piece on Theautochannel.com shows. If a balance sheet is overloaded with debt, the CFO and treasurer can shift the organization’s capital structure. Amazon paid off about $400 million in debt last year, putting it in better shape to survive a downturn, according to The Seattle Times. All parties in the economy – companies, investors, consumers, legislators, and regulators – share some of the blame for the upheaval of the past year and need to play a role in making sure that the new normal is a more sustainable one.

At this point, the Aspen document has generated a fair amount of buzz. The recommendations make sense, and given the names behind them, I hope that they influence the discussions regarding proposed changes to regulations and policies. ###