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Much is said about the importance of companies taking a long-term view of the enduring growth of their businesses.
But how do you take a long-term view when you live in a short-term world?
CEOs are short-term, serving for an average of 4.5 years. Employees are short-term, undertaking multiple careers across the span of single working life. Customers aren’t loyal, product cycles are shorter, and no one wants to own anymore – it’s all about monthly returns and subscription models.
Apart from super funds and large institutions, long-term investors are a dying breed.
Everyone agrees long-term vision is vital, but at the same time market analysts will punish any company that misses their half-year consensus forecast.
Definitions of the ‘long-term’ vary. My humble view is that short-term means one year or less, medium-term is one to five years, and long-term is more than five years. On this basis, it’s safe to say that few boards (and even fewer management teams) spend any significant time developing a truly long-term vision for the business.
The whole notion of long-term shareholder value is antiquated and needs a rethink.
Boards need to have some open and curious conversations about what long-term value for the corporation as a whole means.
In her book The Value of Everything, Mariana Mazzucato rigorously scrutinises the way in which economic value is accounted and argues economic theory has failed to clearly delineate the difference between value creation and value extraction. Her message is urgent and sobering: clarify the meaning of value and redefine how we measure value in our society.
Short-term thinking increasingly dominates corporate decision making, particularly in the listed sector, where the pressure to meet half-yearly earnings expectations has never been greater. While boards do have a duty to monitor performance against plans, they have an equally important role to play in keeping management focused on the long-term health of their companies.
Boards need to become far bolder if they are to make an effective stand against the forces of short-termism, whether these come from inside or outside an organisation.
Boards can choose to shake free from the straitjacket of half-yearly capitalism, but doing so will require discipline and nerve, backed by a strong culture, shared values, and, most importantly, bold leadership.
Naturally, the board should pay attention to short-term performance, but any pressure to change course or make decisions that merely satisfy short-term demands must be balanced against a clear articulation of the company’s long-term vision.
My view is that the board’s first priority is to establish a long-term vision for the business. From this, all else follows. It is a necessary precursor to management’s development of the strategy. That overarching long-term vision acts as the lodestar that can guide the board and management as they look beyond the five-year horizon.
In lockstep with this is the need for boards to display greater confidence in communicating their organisation’s vision to the market. Many boards are reluctant to reveal their forward-thinking if it means admitting to investments that may not guarantee an immediate return.
These demands will only grow as millennials and even younger generations begin to occupy senior positions in business. In a recent Deloitte survey, millennial workers were asked what the primary purpose of businesses should be. Sixty-three percent more of them said “improving society” than said “generating profit”. The next generation is seeking out a higher purpose – not higher profits.
Over the coming years the sentiments of these workers and managers will drive not only their decisions as employees but also as investors, with the world undergoing the largest transfer of wealth in history: $24 trillion from baby boomers to millennials.
Board leadership is imperative. Without a chair continually upholding the long-term view, long-term ideas will never gain traction. The chair must have sufficient conviction, influence, and resilience to stand firm in the face of short-term pressures.
Innovation is not the province of start-ups; it should be across the economy. But it takes discipline to spend time on planning for the longer-term. On my boards, we have monthly conversations about these strategic initiatives and what we might look like and be doing in five years.
My boards are also in the process of adopting Integrated Reporting, which was initially introduced to encourage boards to report about value creation over time. The idea is they are a concise communication about how an organisation’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long-term.
Despite the more immediate concerns of investors, boards truly create value by looking further ahead.
Part of a board’s ability to take a long-term view is informed by how it sees its responsibility to shareholders. The profile and expectations of investors have changed substantially over the past several decades. Therefore, listed-company boards have to ask themselves whether their decisions should be driven mainly by a desire to satisfy shareholders impatient for short-term results or whether they should focus their efforts on working with management to develop a long-term vision for the business. This may arouse criticism and mistrust in some quarters, but it has the potential to create greater and more sustainable value in the long run.
Boards that give their organisation the ability to think and act long-term in the interests of all shareholders, not just those with a short-term focus, create a potential circuit breaker for unethical behaviour. A long-term focus will never be a panacea to unethical practices, but it is surely better than an unrelenting short-term focus that can lead to reckless acts.
John Maynard Keynes famously said that in the long run, we’re all dead; but at least until that day approaches, we owe it to ourselves and those who are to follow to look beyond the next quarterly forecast with a true vision for the future.
Susan Forrester, AM, is a highly respected and accomplished professional Company Director with a powerful blend of management, board and consulting experience across ASX listed, public and private companies. She draws on 25 years of executive management expertise in large professional services firms, covering law, finance, HR, business and governance.