Chapter 11: Remedies to the Myopia Problem

Question 1

Define Myopia

Answer 1

Myopia is the tendency to focus on short-term goals.

=> dysfunctional side effect of a financial results control system

Question 2

Why does myopia occur in organisations?

Answer 2

• managers tend to maintain a smooth, steady earnings growth pattern
  => believe that the stock market reacts myopic
• therefore myopia and gamesmanship result in earnings management

BUT: the stock market is genereally not short-term oriented, nor myopic, and the stock market’s horizon is relatively long

Question 3

What are the six remedies to the myopic problem?

Answer 3

1.) Combination-of-measure system (Balanced Scorecard)
2.) Measure changes in shareholder value directly
3.) Control investments with preaction reviews
4.) Use improved accounting profit measures
5.) Extend the measurement horizon (use long term incentive plans)
6.) Reduce pressure for short-term profit

Question 4

What are the four perspectives of the Balanced Scorecard?

Answer 4

1.) Financial => Shareholder
- operating income, ROE

2.) Customer => Customer
- on-time delivery, % of new products sales

3.) Internal => Where to excel?
- cycle time, yield, efficiency

4.) Learning / Innovation => value creation
- time to dev. new generation, new product introduction vs. competition

Question 5

What are the stumbling blocks for measuring changes in shareholder value directly?

Answer 5

• measurement precision
• objectivity

=> future cash flows have to be estimated / predictet and discounted (very subjective)

Question 6

How to control investments with preaction reviews?

Answer 6

• distinguish operating from developmental expenses
• distinguish today’s from tomorrow’s business

Major limitations:
- no clear distintion possible => vague
- final decisions passed to corporate managers

Question 7

What are the downsides of improved accounting profit measures?

Answer 7

It adds:
- processing,
- reporting,
- reconciliation costs, and
- possible costs of confusion