Short-term and short-sighted often go together, with all too predictable results
Photo: © gimme shelter — Fotolia.com
One of the lessons of the current economic mess is that too many business leaders were driven to make short-term decisions to address financial performance at the expense of looking at the long-term best interests of the company.
Now, with the global economy mired in crisis and the credit markets virtually closed down, companies are struggling to manage the repercussions of those short-sighted decisions.
Airline business models weren’t built with see-sawing oil prices factored in. Banks grabbed at easy profits and didn’t see the credit/subprime crisis on the horizon. Auto makers didn’t anticipate interest in SUVs declining so quickly, nor car loans becoming so hard to obtain.
Wall Street has had its attention glued to its own worries, but it may just be responsible for much of this short-termism and myopic emphasis on quarterly profits as well.
The curse of investment myopia
Why weren’t companies able to see what was happening in time to adjust? Because they weren’t looking that far ahead either.
Companies that trade on stock exchanges around the world are watched closely by industry analysts and investors. As most investors seek the best and quickest possible return on their investments all the time, companies are encouraged to make decisions geared to produce only the most positive, short-term impact on bottom-line results. That way, investors see quick returns and reward companies by continuing to drive up the price of their stocks and bonds.
Yet this short-term financial focus often comes at the expense of essential longer-term, more strategic, decisions that won’t 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 much of a long-term focus. In many ways, they behave less like investors and more like gamblers chasing quick, spectacular wins.
Coping with financial realities
Of course, access to capital is of vital importance to companies the world over. Without such capital, as we are seeing right now, they find it hard to stay in business. That’s why executives don’t simply see the problem and change their ways immediately. It doesn’t make sense to choose an alternative approach that could well reduce their company’s access to necessary capital.
In nearly every company, people burn the midnight oil in the last days of a quarter to ensure they bring in every last dime. In the hopes of squeezing everything possible into the current quarter, aggressive bargaining ensues, last minute deals get cut, and finally, everyone breathes a collective sigh of relief when the quarter-ending bell tolls.
The trouble is that companies and their executives know the tricks of this game. Many game the system, producing results that are not as rosy as they have been made to appear. What we now see all too clearly is the speed with which apparently healthy businesses can descend into near bankruptcy. Maybe they weren’t so healthy after all. Perhaps it’s time to change the rules.
What would happen if more providers of capital expanded their time horizons and let up on the pressure for quick wins? 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.
Short-sightedness isn’t a recipe for success
It’s essential that leaders take the long-term interests of their companies fully into consideration. Short-term performance can’t be ignored, but it’s the long-term strategic focus that will keep the company viable and produce the benefits that come along with such success—local job creation and tax revenues, product and service innovation and success against the competition.
Amongst all the other recriminations and excuses, let’s hope the capital markets take a moment to reflect on their contribution to the causes of the current economic downturn. If they do, they will realize the ‘first mover’ advantage they could reap by being the ones to change 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.
Technorati Tags: strategic thinking, long-term success, creating long-term value, sustained leadership, building organizations that last
December 9th, 2008 at 8:25 am
It all boils down to greed. If you were to look at Arthur Andersen as an example, Andersen was in business for over 100 years. The reason was due to the founders’ ethics that were enduring.
The issue came about where ‘consulting’ was where the money was. Andersen then created a division Andersen Consulting. The consulting branch competed against the accounting division and was making money hand-over-fist. This was just the beginning of the internal corruption that resulted in the downfall of Andersen as well as Enron.
Sure, the (short term) profits were great but the risks were higher still! The legacy that Ken Lay and his gang left behind is nothing to be proud about. Many large and powerful companies fell to greed. The result was the passage of SOX. This does not include the loss of jobs, retirements, and savings as well as reputations!
Having seen what voodoo accounting can do, we sure haven’t learned from that lesson that got us into our current financial mess. Mortgage lenders were eager to sell home to people who were otherwise unable to afford the home. The lender made money, sold the loan to a broker, who sold it down the line — all making ‘funny money’ along the way — money based on nothing!
It is my belief that the end result would be the passage of a SOX II in Congress.
December 9th, 2008 at 9:23 am
@CK: I agree that greed has a great deal to do with it. But so do expectations based on management myths, faulty economic theories and a social culture that values people by what they own, not what they are.
Thanks for your comment. Keep reading, my friend.
December 9th, 2008 at 9:50 am
CK & Carmine,
Thanks for your comments. Certainly greed has a lot to do with this issue. That we can all agree upon. And to be sure, greed seems to be somewhat pervasive in the corporate world. However, as the saying goes, “the buck stops here”. And the “here” must be the CEO and other executives in charge of setting a proper course for their respective businesses. It is not acceptable to simply say things such as “well this is the way it’s always been done” or “I’m just following orders from above”. Rather, these senior leaders must assert their own moral compass to “do the right thing” and not allow greed to be the driving rationale for corporate doings.
December 9th, 2008 at 10:03 am
But what about the added pressures from the stockholders for larger and larger returns on their stock? That too has an effect!
December 9th, 2008 at 11:00 am
When you drive a vehicle you keep an eye on the area ahead of your wheels and another on the distance so that you can prepare your response to the situations ahead. If you choose not to see the distant you are sure to meet with disaster. In medical science you treat the illness i short time and address the problems of wellness by appropriate life style. In case you attempt things in the short term which the body can not take, it is operation successful but patient died situation. It is for the management to dovetail the short term strategies to the long term goals. It is a management failure on the part of the companies and non-governance of economy by the governments. The responsibility is at the top, you know it always starts rotting at the head.
December 9th, 2008 at 11:34 am
@CK: Indeed it does!
December 9th, 2008 at 11:36 am
@sambit: Thanks for your comment. You’re right that the ultimate responsibility lies at the top.
December 9th, 2008 at 11:40 am
Pressure for returns is indeed real, but sustainable returns over the long term are much more desirable and important. As Sambit notes, the ultimate responsibility for this issue and governance of these matter rests at the top of an organization - including executive management as well as the shareholder representatives (i.e. the Board).
December 9th, 2008 at 11:43 am
@Nina Simosko: I couldn’t agree more, Nina. In the end, corporate culture is formed mostly from the top down. Our leaders in recent years abrogated most of their moral and ethical responsibilities in favor of making money for themselves and their shareholders as quickly as possible.
The results are now plain. Leadership always has an ethical component, despite the claims that ethics, and the concept of the wider public good, should be ignored coming from right-wing, free-market thinkers influenced by Ayn Rand (as Alan Greenspan was) and Alan Ginsberg. Failure to recognize this must mean that person doesn’t have quite all that it takes to be a good enough leader.
December 9th, 2008 at 1:42 pm
A couple of thoughts:
Righting the out-of-control economic ship will be a challenge. Einstein suggested: “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” Rearranging the economic desk chairs on the Titanic, or those economists, “banksters” or morally-bankrupt leaders sitting in them, will be fruitless. Who are the leaders who will have the foresight and courage to change the way we look at economics.
Name the following company based on its litany of honors:
Received six awards in 2000 for being environmentally friendly
Fortune - America’s most innovative company for six consecutive years (1996 to 2001)
Fortune - America’s #2 company for Quality of Management, 2001
Fortune - America’s 22nd best company to work for in 2000
Fortune - 2nd ranked American company for employee talent in 2000
Financial Times - Energy Company of the Year, 2000
Global Finance - World’s best company in the Energy Sector, 2001
Answer: Enron
Until folks at the top both humanize the way they do their work and re-introduce the actual use of a moral compass, this economic ship will continue to take on water.
The downfall of many of our institutions today is the the absence of alignment with moral principles. Operating organizations without a soul eventually leads to moral bankruptcy and, as is evident today, financial bankruptcy as well.
Choices, myopic and otherwise, have consequences. Morally-guided leaders see the furtue with their eyes wide open. Morally bankrupt leaders look into the future with their eyes wide shut.
Thanks Nina for this interesting piece.
December 9th, 2008 at 11:56 pm
Hi Peter,
Thanks so much for your excellent points and such a good, true, quote from Albert Einstein! The litany of Enron honors are just horrifying to see from the vantage point of several years later knowing what we now know.
It is interesting to think of organizational “souls” especially in the context of corporations being legal entities separate from the persons involved. Perhaps such separation leads to the persons acting in ways that seem distinct and unaccountable to the legal corporate entity itself. Maybe its time to rethink ways to tie the persons to the corporation in such manner as to align the incentives and synchronize the moral compasses?
December 10th, 2008 at 7:58 pm
Call me a pessimist, but I am not hopeful of business leaders lifting themselves out of greed and short-sightedness. I think the best to hope for that is to change the playing field.
I think there are to many ways that the market allows for short-term profits (as I think Carmine has pointed out before) that certainly go against the Warren Buffet school of investing thought. Derivatives, margin lending, short-selling, negative gearing and other tax tricks allow too much speculative investment based on share price only, and also contribute to volatility when things are bad.
This leads to two things:
- Investors with no interest in particular companies, but simply gambling on prices. I think this is not in the spirit of “investing” and underlying purpose of the stock-market, i.e. allowing companies to raise capital to build their business and allowing investors to share in the resultant profits.
- CEO’s being paid in options based on short-term performance. As a result, CEO’s can come in, fire some people to raise short-term profits and the share price, sell their options (with no real investment needed), then leave so that someone else can pick up the pieces.
December 10th, 2008 at 11:00 pm
Hi Ryan,
I’m not ready to call you a pessimist just yet as I believe that we are thinking along the same lines in regard to changing the playing field. Working in publicly traded companies for many years, I surely understand the needs of market investors for returns on their investments. However, Warren Buffet does demonstrate a success in taking the long-term perspective, even if required to sacrifice short-term profits on occasion.
The litany of fancy investment vehicles created to allow for insanely risky, but exceedingly high short-term gains has clearly led our financial markets into the steep decline that we now find ourselves in. As I stated in an earlier reply, “pressure for returns is indeed real, but sustainable returns over the long term are much more desirable and important.”
Let’s hope that in due time, and not too far from now, those charged with regulating these markets will think about doing the right thing and level the playing field to address these challenges.