Slow Leadership

Western capitalism is fighting a form of business cancer. And the most virulent form of it is short-termism.

In physical cancer, some cells go haywire and turn viciously against the body. This is also what happens when certain core beliefs are perverted or taken to extremes.

Some examples—the beliefs that:

• greed is good (Hollywood simplification).
• individual pursuit of selfish aims yields public good (mis-translated Adam Smith).
• pursuit of short-term corporate goals ends in long-term social success (what’s good for General Motors hasn’t been good for America for some time now).

Those and other beliefs have resulted in rampant short-termism.

A few examples, “ripped from the headlines:”

• The trend in private equity toward front-end deal fees. Gretchen Morgensen’s NYTimes article quotes Michael Jensen, emeritus of Harvard Business School and the “father of private equity:”
  

  “…these fees are going to end up reducing the productivity of the model . . . People are doing this out of some short-run focus on increasing revenues.”

  In other words, private equity is good when it subjects bureaucratic managers to the pressure of markets, with say a 3-5 year timeframe. But when the privateers themselves succumb to the lure of instant front-end fees, the greed snake is eating its own tail.

• The trend in the mortgage industry to convert relationships to transactions—from integrated loan-making and loan-holding, to separating the entire process into various stakeholders—most of whom get their money up front, now. Short term.
• The IBGYBG mentality in investment banking during several market crashes detailed by Richard Bookstaber in his book A Demon of Our Own Design, that resulted in people making fast deals that would explode on investors down the road, but that paid off nicely up front for the dealmakers, who said not to worry, because—”I’ll be gone, you’ll be gone,” it’ll be someone else’s problem then.
• Young financiers opting out of an MBA because the opportunity exists to make so much more money in the short term: “With the growth of hedge funds, you’re getting a lot of really smart people who are getting paid a lot very young,” says Arjuna Rajasingham, 29, an analyst and a trader at a hedge fund in London. “I know it’s a bit of a short-term view, but it’s hard to walk away from something that’s going really well.” Yup on both counts.
• The current residential real estate recession, driven heavily by speculative buyers betting well beyond their means on continued high prices—“I’ll pay off the loan when I flip it.”
• The longer term trend in business toward “alignment” of processes—which often assumes the only way to long-term profit is to ensure that every short-term measure is itself profitable.
• Quarterly earnings pressure, which was one of the original drivers of private equity, back when PE was doing some good.
• Private equity firms selling equity to the public: “a non sequitur in both language and economics,” according to Gretchen Morgensen’s paraphrase of Michael Jensen. The private equity movement initially shook up stodgy companies that were permanently-funded by stock, where inefficient managers could hang out draining away value for decades. Private equity would buy them and insist on returns in 3-5 years; it left managers no place to hide, and produced real value returns. But when the 3-5 year people themselves start selling permanent stock to investors, they have become what they started out to fight. Which means they’re either stupid or venal. And while I usually opt for stupidity in explaining conspiracy cases, in this one I’d put money on venal.

Is there any relief? Or is this just another case of cheap hustlers exploiting weak human nature that goes with every business cycle?

Three antidotes can work against short-termism. One is pain. Suffering may not be a sufficient condition for social change, but it’s usually a necessary one.

Second is education. Awareness creation can help.

The third is leading thinkers, and there are some hopeful signs. Martha Rogers has begun talking about a lifetime financial perspective on customers:

“Creating maximum value from your customers involves optimization — balancing current-period profits against decreases or increases in customer lifetime values, to maximize your “Return on Customer.”

This isn’t new in finance, accustomed to present-value thinking in pricing financial assets. But it’s new to management thinking, accustomed to quarterly EPS. Robbing future customers robs enterprise value, says Martha. And she’s right.

The aforementioned Michael Jensen announced last month a paper he wrote with Werner Erhard = (the controversial founding father of EST training, and more recently of Landmark Forum) on the subject of—get—integrity.

Here’s a tasty quote from the abstract:

We demonstrate that the application of cost-benefit analysis to one’s integrity guarantees you will not be a trustworthy person (thereby reducing the workability of relationships), and with the exception of some minor qualifications ensures also that you will not be a person of integrity (thereby reducing the workability of your life). Therefore your performance will suffer. The virtually automatic application of cost-benefit analysis to honoring one’s word (an inherent tendency in most of us) lies at the heart of much out-of-integrity and untrustworthy behavior in modern life.

They are right too. You can’t fake trust; trust is a paradox; motives matter. The act of justifying trust by its economic value destroys not only trust, but its economic value. The best economic results come as byproducts, not goals.

Can clearer business thinking beat short-termism? It can’t hurt.

Charles H. Green, author of Trust-based Selling and co-author of The Trusted Advisor (with Maister and Galford), is a speaker and trainer on the subject of trust-based relationships in business. Charlie spent 20 years in management consulting, with The MAC Group and Gemini Consulting. His firm is Trusted Advisor Associates, and he writes the blog Trust Matters.

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