IN YESTERDAY’S FT, Richard Lambert, its former editor, heralded the industrial achievements of his fellow Knight Bachelor, Sir Ralph Robins. Under Sir Ralph’s patient guidance, Rolls Royce resisted the tyranny of short-termism to help revive one of Britain’s last bastions of engineering excellence. Sir Ralph often complained about the myopia of the City of London:
What do you want,’ Sir Ralph would ask. ‘A world-leading company in a dozen years’ time, or a bigger pay-out today?
Now that myopia can be measured. Mr Lambert cites ‘The Short Long’, a paper published this month by Andrew Haldane and Richard Davies of the Bank of England. It documents the British and American stockmarkets’ tendency to feel the morrow only dimly, discounting future earnings more heavily than is rational. A pay-out in a dozen years’ time, for example, was undervalued by almost 54% by the markets over the period 1995-2004 (which largely overlaps with Sir Ralph’s tenure as chairman). In the industrials sector, it was undervalued by more than 60%.
If Rolls Royce is an example of a company that resisted myopia, Cadbury is a company that succumbed to it, according to Mr Lambert. Note the preposition he chooses in describing the company’s sale last year to a well-known American food giant:
Shareholders might well have decided to take a small but certain gain from a hostile takeover today rather than wait for the uncertain returns tomorrow from all that new investment. That’s just what happened to Cadbury when it was taken out by Kraft last year.
(Via Free exchange.)
Om diskonteringsrate i finans. Et da/når problem? En Rolls Royce studie.