The Business Council of Australia is to be congratulated on producing an incisive exposition of the underlying defects in addressing long-term business challenges like climate change.

I refer not, of course, to the BCA’s recent analytically challenged report on the impact of the proposed carbon pollution reduction scheme on some businesses, but to its 2004 report entitled “Short-Termism in Australia: a call to think into the future.”

In the report on short-termism, the BCA systematically outlines the immense pressure that corporate leaders are under to prioritise short-term earnings results over long-term value creation and sustainability. For one thing, the annual bonuses and performance evaluations and shrinking average tenure of chief executives sets up a strong bias to deliver earnings growth or else. As one fund manager quoted in the report puts it, “It’s very hard to look past management pay to explain the pressures on the short-term — annual bonuses, short-term share schemes and low tenure is bound to have an impact.”

The BCA notes that Australian CEOs now have to deliver results in two to three years and “a corporate strategy that delivers negative returns during this period, even if it will deliver strong longer-term results for the company, can be fatal to the CEO’s tenure”. It’s easy to see how long-term investments in energy efficiency, for instance, can fall by the wayside.

These short-term incentives for CEOs are magnified by the even shorter-term focus of the funds management industry. Fund managers, who themselves toil under relentless quarterly and annual performance targets, exert a powerful influence over our companies to deliver immediate returns. The BCA concludes Australian institutional investors “are seen to be driven by incentives that over-emphasise short-term fund performance at the expense of support for corporate investment in projects that deliver returns over the longer term”.

The upshot of all this short-termism? Again the words of a top CEO, quoted by the BCA, say it all: “Australian Boards are becoming risk-averse, focusing only on short-term performance. In our industry with very long-term assets, this is value-destroying for all participants.”

Another fund manager admitted bluntly that “fund managers are talking more with CEOs, but it’s not about strategy — it’s about the next results announcement”.

Anybody who believes companies behave in an economically rational way should be forced to recite the BCA’s summary on short-term biases in the business world: “the clear messages from many market participants is that increasingly frequent performance monitoring, particularly by institutional investors, and incentives to maximise short-term performance (related to fund inflows, tenure and remuneration) can exacerbate underlying biases and preferences toward short-term results among most participants in the value-creation chain. In such an environment, company executives believe the market is more disposed to favouring investment projects which deliver more certain, highly observable and shorter-term outcomes at the expense of riskier, longer-term projects.”

We’ve all heard of speaking truth to power; here is a rare example of power speaking the truth about itself.

In light of this, how should we evaluate the BCA’s recent claims that the proposed carbon pollution reduction scheme will drive pollution-intensive businesses offshore? According to the BCA’s own analysis, its own chief executives are under chronic pressure to deliver short-term results. Could it be these short-term pressures are colouring the BCA’s latest effort to influence public policy on climate change?

The BCA’s alarmist report on carbon reductions is a perfect example of the short-term approach the BCA itself has so trenchantly criticised in its recent past. The call in their 2004 report was to “think into the future”. It should follow its own advice.