The short-termism puzzle in Big Tech firms appears to contradict SVO theory: examining the evidence at the firm level of Big Tech

Abstract

Shareholder value optimisation (SVO) theory, as a mechanism of corporate financialisation in non-financial companies, has been used to explain the increased role of shareholder primacy over the firm. Accordingly, this view suggests that short-termist pressures from the shareholder may result in management’s focus on immediate returns rather than the firms long term sustainability. However, this pattern is not evident in Big Tech firms. Instead of adhering to short-termist pressures, these companies exhibit an inherently long-termist approach. This research study seeks to understand how it is that Big Tech firms appear to have contradicted the existing literature on SVO and whether short-termism as a negative consequence of aggressive shareholder primacy remains a relevant concern. A gap has been identified in this research in examining the role of shareholder primacy at the intersection of a powerful Big Tech sector and large institutional investors. The approach of this study has been to argue that Big Tech firms are long-termist by examining their emphasis on setting both control structures and long periods of scaling up in order to create wide moats of competitive advantages. This has been done using a mixed method methodology. The study has focused on the mechanisms which Big Tech has used. These include structures of voting control and setting boards to include directors with long tenures who align with long-termism. Additional mechanisms of scaling up have been examined to identify the tools of scale such as the combination of data, iterative innovation and enabling algorithms as well as the power of retaining large cash reserves. In addition, the study considered possible explanations for why shareholders have accepted a long-termist approach, specifically as investing has transitioned to large institutional investors such as index funds and ETFs. Major findings reveal that voting control structures and strong competitive moats have protected management from short-termist pressures of shareholders. Much of the evidence in this report points to the heterogeneity of the institutional investor as well as the presence of the large passive index funds and the impact of their mandates to adhere to tracking indexes. The study concludes that Big Tech, as a large part of the US economy, does not exhibit short-termism but is explicitly long-termist and that SVO appears to have become a weak construct in the presence of large institutional investors where beneficial ownership is far removed from the ideas of aggressive shareholder primacy