Great study was by Flammer and Bansal (2016) and summarized in the WSJ, CEOs should focus on the long term, a study says. Although the study is coming out soon in the Strategic Management Journal, you can find it here.
The researchers selected companies that were long-term focused based on those companies that had a long-term compensation package presented to the board that was narrowly approved. The narrowly approved implies that this was a bit of a surprise to the executives resulting, potentially, in a paradigm shift toward longer-term focus. The board voting was reviewed from 2005 through 2012 so that there would be room for performance analysis.
There are many positives related to long-term focus all around. Companies with a long-term focus do better all around (profits, net profit margin, sales, stock price, etc.). Those long-term focus had a statistically significant improvement over the longer term (2 years and longer). Interestingly, they had a small dip insignificant dip in the short term.
Longer term companies spend more money on R&D, got more patents, had more patents that "flopped" and had more patents that were "hits". Flops and hits were based on the citations of their issued patents. Lots of citations means hit, not very many means flop. That has issues, but seems acceptable (unless you want to do a market analysis of the patented technologies).
They also did a analysis of exploratory vs. exploitive. This was based on 80% vs 20% of the patents citations being internal to the company. So if lots of citations in my current patent refer to my own prior technology then it is a incremental, exploitive patent. They used a log scale on the number of patents, so a 0.568 correlation could be extrapolated on a logarithmic scale! A 57% correlation meaning that the decision to go long-term-centric resulted in a 57% positive change in the patents. Because they argue a cause-and-effect, they are an argument for causal correlation.
Hits and flops of patents is interesting. First, the patent needs to be more disruptive (exploratory) and new to the company. Then the number of references to the patent were reviewed to see if it gets an abnormal amount of citation activity citing it. Flops would be exploratory that get very low citations. They first combined both hits and flops and indicate that total as a share of all (exploratory?) patents. This is statistically correlated at R-squared of 0.571. Trying a lot results in lots of failures and hits.
Note that the number of flops and the number of hits were statistically correlated: 0.457 and 0.427. This is very interesting, if you aren't trying, then you aren't innovating. In this case, long-term focus means that you are trying and getting a good splattering of both. (They use the methodology here of Azoulay et al., 2011)
Verdict. Boards should focus on long-term for compensation. This means that they have to be willing to take lesser profits in the short term.
There are also very strong correlations to the KLD factors, collectively and all four components: employees, environment, consumers and society.
Verdict. Corporations should focus on sustainable, long-term targets for goals and for compensation.
They have some limitations to this study, but they also combine it with good literature support for long-term-centric management practices. And minimizing the principle-agent problem common to executive compensation.
We want everyone highly motivated by the long-term, sustainable success of businesses (& not-for-profits & Gov)...
Anything else is, well, short-sighted!
Azoulay P, Graff Zivin JS, Manso G (2011). Incentives and creativity: evidence from the academic life sciences. RAND Journal of Economics 42(3): 527–554.