For years, business leaders have complained that the pressure to produce ever-improving results on a quarterly basis inhibits their ability to plan and invest for the long term. Few of them have the guts to do anything about it. If they “miss” their quarter--meaning their profits fall even an iota short of the average earnings forecast by the Wall Street analysts who issue recommendations on their stock--they are punished severely. Their stock price takes a drubbing.

As a result of this situation, companies spend too much time and energy twisting their business into something that meets Wall Streets expectations. That's bad for them, bad for their customers, bad for their employees, and bad for the economy.

Still, badness rules.

I'm sorry to say that I don't have a brilliant and painless solution for this problem. It takes a rare CEO—brave and expert at communicating—to buck the system. And an brave board of directors, as well. Here's an amusing and enlightening little anecdote that shows just how far we have gone in the wrong direction—and suggests a path back to a more rational approach to performance monitoring.

As part of a project I'm working on at IBM, I have been listening to reel-to-reel tapes of a management retreat held by the company in November of 1955 at a resort in Pennsylvania's Pocono Mountains. It was to be the last such meeting for Thomas J. Watson Sr., who had led the company since 1914, and the first one run by his son, Thomas J. Watson Jr. This was a Big Think session for the executives, and, as a stimulus, Watson Jr. had invited Peter Drucker, the father of modern management, to address the group.

At the time, institutional investors were just then emerging as a major factor in the capital markets. While Drucker hailed that development as a boon to corporations, he warned that these investors' need for steady flows of income could become a problem. Because of increasing use of automation, industrial corporations were changing in fundamental ways. Automation reduced their reliance on production workers, who could be hired and fired quickly in response to changing demand, and increased their use of fixed costs—for equipment and for professional and engineering workers whose efforts weren't linked tightly with particular units of production. As a result, he said, companies' profits were beginning to fluctuate more dramatically. And their profit flows were out of sync with the wants of their institutional investors.

His advice: IBM and other companies had to educate institutional investors so they understood the need for long-term planning and investing—and to convince them to live with fluctuating profits. Now here comes the shocker: At the time, companies were measured on their performance on an annual basis, not quarterly. “Don't consider profit an annual event, but look at profitability over a much longer time cycle,” Drucker urged the IBMers. His suggestion: Six to seven years seemed about right. He scoffed at short-sightedness, saying it's what separated non-managers from managers. He asked: “Is there anybody in this room who makes a decision for so short a period as 12 months, ever?'

Now, I'm not suggesting that Wall Street should shift from quarterly to eight-year performance measurement horizons for corporations. But I believe that if the top 15 or 20 corporations spent more effort convincing investors to take a longer view and less effort managing their profits, then investors, workers, consumers, and the global economy would be much better off.