Can We Overcome Short-Termism

Short-term focus is one of the biggest problems in business today. And it’s also one of the most intractable.

With CEO tenures in big businesses averaging around 5 years, it’s little wonder that long term value creation takes a back seat. 

In the world of executive remuneration, 3 years is considered “long term”… But put that into the context of a new product innovation – 3 years is barely enough to design, develop, and market test the product, let alone turn it into a cash cow.

There are faster, easier, and more reliable ways for CEOs to earn their bonuses.

Even though I’ve trained myself over the years to take a longer-term view of the world, instinctively I’m the same as everyone else. 

It’s hard to break free from the pressing issues of today, when the need for instant gratification is driven by shareholders and boards, and the consequences of poor long-term decisions feel so far away.

There are a number of drivers for short-termism, and I’m going to give you three examples of the root causes of short-termism. My hope for you is that, if you’re aware of the long term impacts, it may help you to make better decisions.

The first root cause is the strategy conundrum. When executive teams and boards devise their strategies, they often look at one or two years of forward financial projections, and extrapolate those out to the end of the strategy window, which might be 5 years.

This forces you to focus on doing the things that deliver pay back in the short-term, without recognizing the fundamental objective of business: to create value!

Value creation is all about Return on Invested Capital, and the overriding objective should be to generate a ROIC that’s as high as possible, for as long as possible.

But, instead, the strategy (which in itself is pretty short term) is translated into a set of annual KPIs for the coming year that deliver more of the same!

The second root cause of short-term focus is cost cutting. Sometimes, if a company is in crisis it’s unavoidable…

… but many companies make short-term cost cutting decisions with little regard for the impact on long term value.

Deciding to pare back investment in asset maintenance, IT upgrades, or safety systems, for example, may give you a short-term uplift in earnings and help you to reach your annual targets.

But eventually, you have to pay the piper. Any cost cutting just kicks the can down the road, exposing future management teams to higher baselines of both cost and risk.

The third root cause of the drivers for short-termism might surprise you. It’s the fact that organizations are completely rational… 

They have rational processes, rational incentives, and rational people who make rational decisions.

The late, great, Clay Christensen, in his seminal book, The Innovator’s Dilemma, explains the downside of this rationality. 

Improving the returns from an existing product, by either expanding the market, or improving the product itself to make it more competitive, is the “go to” solution for rational managers.

“If you had $1m of capital to spend, why would you invest it into an unproven product with high risk and no clear financial return profile, when you could invest it to increase the returns of an existing product.”

One can imagine that exact dilemma being debated in the boardrooms of Kodak and Nokia many years ago.

The rational, short-term decision to make money today is always a trade-off that borrows from the long-term returns that innovation delivers…

Companies that don’t balance short-term and long-term considerations often end up destroying incalculable value… and these are destined to become case studies for future generations of leaders to ponder.