by Chad Tragakis, Senior Vice President, Hill & Knowlton, Washington
Anyone who has ever run a 10K or 10 mile race (or longer) knows that you can’t start by going all out. You have to work up to cruising speed. And you need to leave something in the tank for the last part of the run. This is seemingly common sense, but for many “running” on Wall Street and within the business community generally, it is a lesson that bears repeating. Long runs require a sustainable pace. And if a business or an investment is to enjoy long-term success, it must create sustainable value.
This is the subject of a new report prepared by the Aspen Institute Business & Society Program – Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.
The CFA Institute defines short-termism as: the excessive focus of some corporate leaders, investors, and analysts on short-term earnings guidance, coupled with a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation.
That pretty much nails it, but as the Aspen report states, short-termism is not limited to Wall Street. It pervades the entire web of business – corporate leaders, company boards, investment advisers, providers of capital and even government. Therefore, the report concludes, meaningful reform will only come from comprehensive, system-wide change.
Built to Last remains the business world’s classic tome on the strength, success and longevity of visionary companies. In its wake, there have been a number of notable books on the value of taking a longer-term and more holistic approach to business – the works of Christine Arena, Stuart Hart, Marc Gunther and Jeffrey Hollender come to mind. And plenty of CEOs can be found espousing the merits of “taking a long-term approach to the way we do business” in speeches at CSR forums and in the letters that introduce corporate responsibility reports.
But under the current system, the current pressures, I wonder how well a CEO can truly serve two masters?
Take, for instance, a genuinely well-meaning (and in this case, fictitious) CEO who gives a speech to his employees on the importance of creating sustainable value for all stakeholders. But then two hours later, this same CEO tells his sales managers that they need to hit their quarterly numbers… or else. And then later that day, he tells his plant managers that they need to increase productivity… or else. When interests compete, which ones win? His conflicting messages may well contribute to poor decisions by managers and cutting corners that can irreparably harm a company – workplace accidents, questionable deals, not following established procedures.
Is abandoning short-termism expecting too much for today’s companies? Is capitalism, or at least capitalism in its current form, diametrically opposed to thinking and acting in the long term?
I hope not. There are many examples of companies who are trying very hard to strike that delicate balance between competing and often conflicting short and long-term interests. Logic would dictate that these firms, the ones who do it best anyway, will be rewarded in the marketplace. I hope that bears out. The suggested solutions outlined in the Aspen Institute report, namely market incentives that encourage patient capital, seem very reasonable. They would be a great start.
The best expression of sustainable value that I have ever heard comes from the ancient Greeks. And although they were speaking about the importance of taking a generational view of society, it applies equally well to business.
“A society grows great when its people plant trees in whose shade they know they shall never sit.”
One could easily substitute the word “company” for “society.” And if you look at the companies that have been around for 50, 60, 70 years or more, and others that are seemingly built to last, I suspect you would find this attitude to be prevalent… planning, thinking and decision-making with the next generation of employees, customers and stakeholders in mind. It would be a fitting slogan to see posted in board rooms, in the C-suite and of course, all over Wall Street.