“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 2012 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.
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 2013 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?
Bob Vanourek and Gregg Vanourek, father and son, are co-authors of Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations.