Oct 02, 2013

We’re In It For the Long-Term

Long-Term Group

Thought leaders gathered in Claremont Sept. 19-20 to share ideas on how to counter corporate myopia.

About This Project

In September 2013, a group gathered at the Drucker Institute to discuss how to encourage more long-term thinking in the corporate community.

Our agenda was threefold: to learn what each other is doing to counter corporate myopia, to see where we might be able to form natural alliances and support each other’s work, and to determine whether our various actions might somehow add up into a larger movement.

Participants included Jack Bergstrand of Brand Velocity; Bill Densmore of the Rules Change Project; Chris Halburd of the Purpose of the Corporation Project;  Vlatka Hlupic of the University of Westminster; Michael Kleeman of the University of California at San Diego and the Sustainability Accounting Standards Board; Peter MacLeod of Wagemark; Roger Martin of the University of Toronto; Jody Miller of Business Talent Group; Miguel Padró of the Aspen Institute; Doug Rauch of Conscious Capitalism; Lynn Stout of Cornell University; Jason Voss of the CFA Institute, Rick Wartzman of the Drucker Institute; and Michele Zanini of the Management Innovation eXchange. Others involved in the event were author Stephen Denning and Richard Straub of the Peter Drucker Society Europe.

You can read more about the Forum in this online column for Time magazine.

One of the outcomes of the event was a commitment by the group to share knowledge that speaks to the perils of short-termism and the promise of a more long-term mindset. If you’d like to contribute your own “knowledge nuggets” to this page, please contact Ian Gallogly at [email protected].

Knowledge Nuggets

“You have to produce results in the short term. But you also have to produce results in the long term. And the long term is not simply the adding up of short terms.” —Peter Drucker

Research suggests that because financial analysts and their investor clients have little tolerance for short-term failures, the more Wall Street covers a company, the less innovative it is.

In a survey of more than 400 financial executives, 80% of the respondents indicated that they would decrease discretionary spending on R&D, advertising and maintenance to meet short-term earnings targets, and more than 50% said they would delay new projects, even if it meant sacrifices in value creation.

Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits.” —Warren Buffett, chairman of Berkshire Hathaway

“Long-term behavior is just much different from short-term behavior—it encourages a different morality.” —Michael Lewis, author of The Big Short

Companies with long-term cultures and a focus on sustainability outperformed matched companies in terms of total shareholder returns by 4.8% annually for a total of 18 years, according to a Harvard Business School study.

Between 1975 and 2010, the average period for holding shares on the New York Stock Exchange declined from six years to about six months.

Issuing earnings guidance, a McKinsey survey found, has no impact on shareholder returns but can be a powerful incentive for management to focus excessive attention on the short term and, in some cases, to manage earnings inappropriately from quarter to quarter to create the illusion of stability.

“If you’re long-term oriented, customer interests and shareholder interests are aligned. In the short term, that’s not always correct.” —Jeff Bezos, CEO of Amazon

“Securities analysts believe that companies make money. Companies make shoes.” —Peter Drucker

Researchers have found that publicly traded companies tend to invest substantially less and are less responsive to new investment opportunities than their privately held peers, suggesting that companies exposed to market pressures are more likely to suffer from managerial myopia.

“The result of the increased importance of bonuses and the use of these measures of performance is that managements are now less inclined to take short-term risks, such as cutting profit margins, and more inclined to take the longer-term risks involved in lower investment and the possible loss of market share that will result from higher margins.” —Andrew Smithers, author of The Road to Recovery

“CEOs and others often spend more time smoothing earnings to benefit themselves personally in the short term than they do building companies and benefiting shareholders in the long term.” —Daniel Pink, author of Drive

Since the late 1950s, the “topple rate”—the rate at which companies switch leadership positions in a sector—has soared 39%, according to Deloitte’s Center for the Edge, making it “tempting . . . to address surface disruptions in the short term” even though “more lasting value can come from understanding and harnessing the forces underlying them.”

“The ultimate irony may be that the allegiance to shareholder value has caused the very problem it was intended to cure: enriching senior executives at the shareholders’ expense.” —Mark Kramer, Managing Director of FSG

There’s a growing body of evidence that the companies that are most successful at maximizing shareholder value over time are those that aim toward goals other than maximizing shareholder value.

Since the late 1990s, the number of U.S. and global equity listings are down 46.9% and 16.8%, respectively, suggesting that long-term corporate value creation is on the decline.

Since the early 1990s, equity turnover—a measure of the number of times in a year that corporate shares are sold—has skyrocketed from 48.52% to 187.62% in the U.S., indicating an increasingly short-term mindset among investors and, in turn, heightened short-term pressure on managers.

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