Are we, as business leaders, being driven to make decisions we might not otherwise make? What I mean by this is, are businesses, especially those that participate in the capital markets, making decisions that address short-term financial performance at the expense of looking at the long-term best interests of the company?
With the global economy working its way through the subprime crisis and near $130 per barrel oil prices, companies are struggling to manage the repercussions. Airline business models surely weren’t built with these high oil prices factored in. Banks didn’t foresee the credit/subprime crisis on the horizon. Auto makers didn’t anticipate interest in SUVs declining as quickly as $100+ fill ups have caused. Why aren’t these companies able to see these things happening with more notice? Well, Wall Street may just have something to do with it.
Companies that trade on stock exchanges are watched very closely by industry analysts who then relay their insights to investors. As most investors seek the best possible return on their investments, companies often times make decisions that have the most positive, short-term impact on bottom line results. In this way, investors see returns and reward companies by continuing to invest even more money. However, this short-term financial focus often can come at the expense of companies making longer-term, more strategic, decisions that might not have as good a short-term financial effect. Unlike Warren Buffet, who has been quoted saying “our favorite holding period is forever,” most investors do not have a very long-term focus.
To be sure, access to capital is of vital importance to companies the world over. Without such capital, corporate investments would disappear, innovation would wane, jobs would become scarcer and the global economy would suffer significant consequences. So, certainly I don’t promote anything that would ultimately reduce a company’s access to such capital. What I do propose, however, is that more providers of capital expand their time horizons. Perhaps not as much as Warren Buffet, but at least enough to allow companies to make decisions based on periods that go well beyond the next quarter’s financial results.
In nearly every company, people burn the midnight oil in the last days of a quarter to ensure that they bring in each and every last dime of sales. In the hopes of squeezing everything possible into the current quarter, aggressive bargaining ensues, last minute deals get cut, and finally, companies breathe a collective sigh of relief when the quarter-ending bell tolls. But, by now, all companies know the game and, as such, many game the system so to say, thereby leading to less than ideal outcomes for the benefactor company. Perhaps it’s time to change the rules of the game. But, such a change must be driven by those with the capital, for as the Golden Rule states, “he who has the gold, makes the rules”
Undoubtedly, leaders must take the long-term interests of their companies into consideration. To be very clear, however, this is not to say that short-term performance is to be ignored. But, it is the long-term strategic focus that will keep the company ahead of its competitors and viable for years to come, with all the benefits that come along with such success – local job creation and tax revenues, product/service innovation, continued financial success, etc. Let’s hope the capital markets take a moment to reflect upon the causes and implications of the current economic downturn. I suspect that if they do, they will realize the first mover advantage they could reap by being the one that changes the rules of the game going forward. After all, if my thinking is right, they will see that their returns will ultimately be higher over the long-term by looking further out into the future than just 90 days.
Nina nets it out: While keeping a steady eye toward financial performance, make sure to pay close attention to the appropriate time frame. Sometimes, short-term gains can be had at the expense of long-term value. Truth be told, there may very well be times when such a decision makes complete sense. But, for sure, long-term viability is a far greater accomplishment than short-term flash followed by a fizzle. [Think about a magician’s flash paper … brilliant in its momentary flare but gone equally as fast].
Good stuff Nina – spot on. This short sightedness of management ultimately trickles down throughout the entire organization as employees routinely sacrifice long term prospects in lieu of short term results that best serve their own self interest. The comp plans employed by many organizations only reinforce these myopic behaviors.
With the high demand for short term results by those in the equity markets its easy to see why the average tenure of today’s CEO is only around five years.
Chris,
How right you are! If average tenure at that level is only 5 years, it is likely less at lower ranks and how can anyone reasonably expect people to take a long-term perspective? Certainly, it is difficult, if not impossible to engender that longer horizon into employees’ minds if they are thinking about where they will be working next. It’s somewhat analogous to customer loyalty issues ultimately relating back to employee loyalty. Maybe another topic for a future entry?
Nicely said, in today’s swiftly moving market short-term gains often usurp long-range success as priority. Which begs the question: we know the problem, so what’s the solution? How can a company successfully incentivize and promote long-range strategic thinking?
Totally Consumed,
I don’t profess to have the answer, but I do believe, as I point out in my entry, that changing the mindset of the capital providers is crucial to any solution. Certainly, some companies try to accomplish longer-term perspectives by issuing stock/options to employees. I am not sure that this necessarily achieves the goal, but it does change the horizon beyond 90 days.
Good subject matter, Nina.
Some years ago I advised a president of a bank-owned mortgage lending division about what types of borrowers were most appropriate for Alt-A/Subprime loans. The advice came after he expressed concern over the watchful eyes of the OCC. I told him that there was a simple solution: stop lending to 75% of the population, because those people will more than likely default and go into foreclosure. The loans were risky and too complex for the average borrower-regardless of their credit background. My advice went unheeded. That conversation happened two years before the meltdown.
I believe many bankers allowed greed to overtake sound logic, even as the the storm clouds were forming.
The only solution I see, at this time, is to let the purge play out and begin anew after the dust settles. Additionally, I would require all C-level leaders to be trained on how to handle greed and power. Those are twin elephants in the corner of the room.
Eric,
Thanks for sharing your comments. I believe that your banking client could very well have been blinded by greed as you say, or possibly short-term performance pressures from “corporate”. Either way, the unfortunate reality is the same – a less-than-ideal longer-term performance.
I don’t disagree that the current situation must play itself out. However, I hope that C-level leaders not only learn about managing power &/or greed impulses; but, that capital providers learn to extend their time horizons to accommodate long-term success and viability, even if at the expense of short-term gain.
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