Why are short-term incentive systems so damaging?

Because they are rational for the individual inside them. A CEO who needs to demonstrate progress quarterly will never rebuild the product from the ground up for the AI age because that takes time and removes the local feedback loop. It is not that executives want to think short-term. It is that they are intelligent actors optimizing for the incentive structure around them. Show me the incentives and I will show you the outcome, as Charlie Munger always said.