Are quarterly earning reports hurting the US?

by Patrice Sarath, August 12th, 2008, 7:00 am

In The New Yorker recently, an article discussed antibiotic-resistant bacteria, strains that are so resistant they make an MRSA infection look like a walk in the park. So what does this have to do with quarterly earning reports? Well, drug companies have, by and large, pulled out of antibiotic research because it’s not where the money is. When you have shareholders to mollify, you direct your research platform toward blockbuster drugs. No matter how much we are going to need new antibiotics, they will never be profitable for drug companies (especially since overuse is what got us into this mess in the first place).

Richard Syron, the CEO of Freddie Mac, recently allowed that even if he had acted on 2004 warnings that the company was underwriting very high risk loans, there was little he could have done about it.

“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview. But if Freddie and its sister, Fannie, had kept their underwriting standards tight, fewer bad loans would have been made and the subprime crisis could have been partially averted.

Never really healthy, the auto industry has been bleeding cash over the years, interspersed with short periods of remission. Now the cure — trucks and SUVs — has become the disease. Automakers grew too comfortable building for the “cheap gas” economy, even when interest was rising in hybrids and electric cars, and they marginalized their research in these new technologies. And that was before gas prices soared. Now they are playing catch up, but don’t expect changes any time soon. Gas prices have dropped a little, and the short-term mentality (i.e., quarterly earning reports) will come back into play.

The oil companies have been reaping record (some say windfall) profits. Each quarter as gas prices rise, so have their profits. Nice, huh? A port in the storm? But their business model is built on a non-renewable resource. Oil sands, offshore drilling, Arctic drilling … it doesn’t matter. The oil is going to run out. Instead of quarterly earnings, shouldn’t we be asking ExxonMobil and its ilk what their long-term plans are?

As Syron points out,  companies answer to shareholders. At what point do we require companies to answer to the rest of us? As long as a company’s success is measured in quarters, can our industries build the products and provide the economic stability that the we need for the long term?