“The future whispers while the present shouts.” –Al Gore, former U.S. Vice President
One of the great scourges of our age is “short-termism.”
A staggering 78 percent of the managers surveyed in a large-scale study of CFOs and CEOs admit to sacrificing long-term value to achieve smoother earnings.
In July 2011, former Federal Deposit Insurance Corporation (FDIC) chair Sheila Bair wrote:
“The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience.”
Our earlier blog, “Suicide By Quarter—Leading for the Short-Term,” indicated the investor base in corporations is not homogeneous. We have day traders who live by daily stock fluctuations, but there is a growing body of investors—notably including “impact investors”—who want excellent, ethical, and enduring results. These impact investors aren’t the Carl Icahn’s green-mailing for some short-term cash distribution or breakup of a firm. They have a longer-term horizon.
How to Stop Short-Termism
Some experts insist the key to stopping short-termism is to educate large asset owners (pension and mutual funds, insurance companies, etc.) to adopt investment strategies aimed at maximizing long-term results. Such education may take time.
So, what can the senior corporate leaders do to scuttle the scourge of short-termism? Here’s our checklist:
- Ensure the board defines the high-performance culture of character they need in the firm and then hires and fires leaders to create that culture.
- Ensure the board, the CEO, the CFO, and the VP of Investor Relations are all on the same page when it comes to focusing on the long term.
- Inform investors what you intend to do on the short- versus long-term trade-off. Let them choose whether to invest or not.
- Ensure the performance measures on which incentives are based are focused on long-term value creation, not short-term metrics.
- Stop giving earnings guidance. The future is uncertain. Your job is to run the firm, not help others make forecasts.
- Be transparent with all your stakeholder indicators (the financials, quality levels, employee retention, market share, customer satisfaction measures, and more).
- Educate all stakeholders on your long-term vision and strategy.
- Focus on long-term issues in your public pronouncements.
- Recognize your job is not to maximize shareholder value at the expense of other stakeholders, but to create value for all your stakeholders.
- Understand that sometimes you will have to tilt to the short-term if survival is at stake. See our blog, “Tilts: Short- Versus Long-Term.”
There are no easy answers to the scourge of short-termism. Taking the high road can be costly and painful in the short run. But we can no longer afford short-termism. In time, it comes back to haunt us.
Core Concept: Corporate leaders can take clear and decisive action to eliminate the scourge of short-termism. It takes courage, but great leadership requires courage.
Practical Applications
- How many of these checklist items will you champion?
- What are you waiting for?
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Bob Vanourek and Gregg Vanourek are leadership practitioners, teachers, trainers, and award-winning authors. They are co-authors of Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations, a winner of the International Book Awards, and called “the best book on leadership since Good to Great.” Take their Leadership Derailers Assessment or sign up for their newsletter. If you found value in this, please forward it to a friend. Every little bit helps!
