Saving Capitalism From Short-Termism: How to Build Long-Term Value and Take Back Our Financial Future

Rappaport, who wrote Creating Shareholder Value and co-wrote Expectations Investing, argues that the shareholder value idea has been corrupted in practice and that what corporations, investors and regulators now pursue is short-term share price rather than long-term value.

His diagnosis identifies specific mechanisms. Executive compensation tied to short-vesting stock options and to annual earnings targets rewards actions that raise the current price at the expense of value. Quarterly earnings guidance commits management publicly to a number and then produces the accounting and operating decisions required to hit it. Fund managers are measured over periods far shorter than the investments they hold, which forces them to trade on quarterly results. Analysts' consensus estimates become the target that management manages to. The accounting itself treats value-creating investment in research, brand and training as expense, which makes long-horizon investment reduce reported earnings.

His proposals are concrete: abolish quarterly guidance, extend option vesting well past a chief executive's tenure, index option strike prices to sector performance so managers are not paid for market moves, pay fund managers on long-horizon results with their own capital at risk, and supplement statutory reporting with a corporate performance statement that separates cash flows from accounting estimates.

The book is a practitioner argument rather than empirical research, and the evidence that short-termism reduces aggregate investment is contested among economists. The specific compensation and guidance proposals are the most actionable part and several have been adopted since.

Professor emeritus at the Kellogg School of Management, Northwestern University; originated shareholder value analysis.

Creating Shareholder Value demonstrated that reported earnings and accounting growth do not measure value creation, and identified the cash flow drivers that do - a framework corporate finance departments still run on. Expectations Investing, written with Michael Mauboussin, inverts the exercise: read the expectations already priced into a stock, then judge whether the business can beat them.

Kellogg School of Management, Northwestern University, The Alcar Group