Researcher Terhi Chakhovich from the Department of Accounting at Aalto University’s School of Business has published a research paper in Accounting, Auditing and Accountability Journal. For the purposes of this and further research, she studied two Finnish listed companies and interviewed the management, owners and outside stakeholders.
’Share price is considered a long-term oriented issue that commits and motivates the management towards long-term activity by providing the foundation for reward. However, the impacts are not that simple. A share price-based reward system can also be short-term oriented, depending on how it is built, the attitude towards share prices inside the company and the management's other share and option ownership,’ says Chakhovich.
The empirical data and a literature study show that it is a myth to assume that a reward system based on share price is automatically long-term in nature.
The researcher has divided companies’ time orientation into present-based and future-based rationality. In her analysis, Chakhovich demonstrates that effective, sensible and efficient present-day actions by companies can automatically be assumed to produce a good result in the future.
’This is a reasonable rationale in financial markets, because it’s impossible to forecast how a company’s share prices will develop. The aim is to carefully examine the present in order to determine what is happening and quickly react to take opportunities into account.’
According to the researcher, companies often use future-based rationality. This involves envisioning the future and then determining what should be done in the present so that the future will be realised. When using this model, it is important to consider the future diversely and widely and look for broad lines – on the other hand, this is difficult because bold plans can be perceived as far-fetched. There are already examples of companies that have lost the entire base for their business and products because of a failure to take the future into account.
’Share prices are strongly linked to present-based rationality: the target is to act effectively and quickly and achieve an increase in share price. However, there is not single key to success,’ notes Terhi Chakhovich.
Companies should have two types of plans: along with concrete and believable plans they also need freely visualised ideas regarding what might happen to the company in 10 to 20 years.
’Today many companies use a story to communicate with share markets and analysts. This narrative often originates in the present day, and the story should be consistent and believable. However, companies should also freely visualise the future as something separate from the present, and imagine everything that could possibly happen in technology and industry development. The upper management should have far-reaching visions and imagination,’ says Terhi Chakhovich.
Text: Helinä Hirvikorpi
Photo: Lauri Tuisku