Short-term thinking seems to have become the strategy of choice for many publicly traded companies—including most of the larger aerospace concerns—as they fixate on share buybacks, above market-average dividends and free cash flow as the principal metrics of overall performance. Northrop Grumman, for one, is borrowing so it can expand its share-buyback program.

No one can argue that such strategies haven’t delivered an impressive payback. Swimming in cash, the aerospace industry has been one of the best performing sectors in terms of shareholder value in each of the last five years, and stock prices for prime contractors are at or near 52-week highs. 

Problem is these gains may be coming at the expense of creating long-term value in the form of new and more-innovative products that companies will need to be competitive. They also may be distorting investors’ expectations. General Dynamics has one of the most aggressive share-buyback programs, while allocating a relative pittance toward independent research and development (IR&D). 

“Leadership philosophies are mixed across the industry, but some companies are mainly interested in returns in as little as a year or two,” says Frank Kendall, U.S. undersecretary of defense for acquisition, technology and logistics. Kendall is trying to figure out how to incentivize companies to be less risk-averse and focus more on long-range business opportunities—cyber, autonomy (air and undersea), data analytics and battery technology, among others—by investing more of their own resources in R&D. 

Company-funded R&D has been about 2% of annual sales since 2003, according to Byron Callan, a director at Capital Alpha Partners and a leading independent analyst of the aerospace and defense sector. To put this into perspective, combined IR&D spending in 2014 by Boeing, Lockheed Martin, Northrop Grumman and Raytheon was about one-third of such investment by Google, one of the world’s most technologically innovative companies. 

The short-term orientation is hardly surprising. Companies generally see longer-term strategies as too beset by uncertainty. Only short-term plans can have a real impact on business. Yet this logic hides a paradox: Preoccupation with the short term can lead to temporal myopia in which management can miss industry changes that erode long-term competitive positions.

This was not always the case. Larger companies used to be more accepting of the risks of developing new technology and were willing to take longer investment horizons. Perhaps Tom Jones, who was Northrop chairman and CEO from 1963 to 1990, embodied this spirit best, listing customers, employees and owners—in that order—as his priorities. 

But the industry has changed dramatically, and not entirely for the better, since Jones and his peers called the shots. In today’s hyper shareholder value-driven environment, investors are more apt to penalize a company than reward it if management moves to raise company-funded R&D investment to develop more innovative products to grow the business. “For the majority of primes, there isn’t likely to be stepped-up R&D that materially impacts reported margins,” Callan says.

But there are outliers. For example, in the late 1990s and early 2000s Raytheon boosted R&D investment around gallium nitride-based monolithic microwave integrated circuit technology to develop lighter, more capable high-power amplifiers, air and missile defense radars, and other sensors. Management did a good job articulating its technology roadmap to investors and other stakeholders, and positioned the company to win major contracts 5-10 years later.  

In an apparent continuation of the same mindset, Raytheon will increase company-funded R&D investment in 2015, with a focus on the next generation of jammers, sensors and other advanced defense electronics for use in missiles such as the Tomahawk (see photo). Callan speculates the company may be inclined to take a more strategic view of how it creates value due to the makeup of its board of directors. They generally are individuals with more of a technology orientation than an industrials background, he says, and therefore have a keener appreciation for maintaining a robust technology-development pipeline. 

In the growing dialogue about IR&D and whether it’s sufficient to meet customer needs and ensure long-term competitiveness, it is chief executives who usually are on the defensive. But they serve at the behest of boards of directors, and maybe it is the latter that deserve to be in the hot seat. For example, how rigorously do they question the balance between long-term value-creation strategies and short-term financial gains? And how attentive are they to how future successes should be measured? Or are they just rubber-stamping whatever is put in front of them?

Obviously many factors drive performance, and it would be exceedingly difficult for any company to claim a direct causal link between longer-term planning and superior performance in and of itself. Rather, thinking longer-term creates an environment that can help shape performance-enhancing factors, and in that vein the buck stops with boards for their accountability, or lack thereof. 

Anthony L. Velocci, Jr., was editor-in-chief of Aviation Week & Space Technology from 2003 to 2012.