Short-termism
Short-termism is the tendency of financial performance metrics such as ROI and residual income to incentivise managers to cut long-term investment or defer maintenance in order to improve near-term results, at the cost of sustained.
See it move
A manager judged on this year's ROI or residual income can boost the number by deferring new machinery, cutting training and R&D, or pulling revenue forward — each of which flatters the current period. The cost lands later: an ageing asset base, a weaker skills and innovation pipeline, and earnings effectively borrowed from future periods. The balanced scorecard counters this by tracking non-financial measures alongside the financial ones.
Check yourself
A divisional manager under pressure to meet this year's return on investment target cancels a capital project with a strongly positive five-year NPV because it would expand the asset base and reduce short-term ROI. She also cuts the annual staff development programme to lower costs before the year-end report. Which behavioural tendency do these actions illustrate?