Many publicly-held American companies are infected with a bad case of “short-termism”, the trap of managing the company to meet quarterly earnings expectations at the expense of long-term interests. Many economists have speculated that short-termism negatively impacts research and development investment, resilience, and job creation. While the quarterly earnings cycle started the short-termism trend in publicly-held companies, it is creeping into private company C-suites as more and more owners push rapid revenue and earnings growth to maximize near-term exit values.
In February 2017, McKinsey Global Institute (MGI) published a discussion paper on the effects of short-termism. MGI studied 615 large and mid-cap US publicly-held companies from 2001-2015. Their initial findings indicated that long-term thinking companies outperformed their shorter-term peers on a range of metrics:
- Long-term firms cumulatively grew on average 47 percent more than other firms and with less volatility
- Long-term firms invested almost 50% more in research and development than other companies
- The market capitalization of long-term companies grew, on average, $7 billion more than that of other firms
- Long-term firms added nearly 12,000 more jobs on average than other firms
MGI noted that had all publicly-held US firms created as many jobs as the long-term firms, the U.S. economy would have had an additional 5 million new jobs and more than $1 trillion in additional GDP during the study period. MGI notes that there is more research to be done on this topic, but the results to date are compelling.
What about your company? How could you manage your business for the long-term with the hope of reaping some of the benefits described above? Here are seven ways to manage your business for the long-term.
Seven Ways to Manage Your Business for the Long-Run
- Continually and patiently Invest in products and services
Investment in new products and services takes time, money, and usually patience. Typically, there are setbacks along the way that consume valuable time and capital. The hallmarks of long-term companies are persistence and patience as they resolve issues and resist the temptation to rush products and services that are not ready for market.
- Invest in systems and processes for scalability and efficiency
Often companies are rushed to put processes and procedures in place to support a new product, service, or customer. While the initial process set-up may need to be patched together to get through the start-up phase, managers thinking for the long-term will revisit those processes and do the hard work of redesigning them for scalability and efficiency. They will also take the time to train their teams on the new processes and continually seek input to make them better.
- Invest in people development
Companies that manage their business for the long-term invest in their people. They accurately and completely define their roles, communicate expectations, continuously train, and provide feedback to ensure their development and success. Long-term thinking companies also do not tolerate employees who do not fit the culture or who will not positively respond to training and feedback.
- Do the right thing for the customer rather than focusing on a short-term win
Believe it or not, some companies become so ingrained in short-termism that they are unwilling to do the right thing for the customer if it means sacrificing current revenues. Problems and mistakes happen. Customers typically care more about how you respond, communicate, and remedy the mistake than the fact that the mistake happened. Many customer relationships have been significantly strengthened by a quality response to a problem. Long-term thinking companies always look to take care of the customer first and live with the short-term financial impacts.
- Do not kick problems down the road
Long-term managers do not let problems fester and continue to drag down morale and performance. Whether it is people, process, or product issues, problems that surface are dealt with even if it takes time from other urgent issues. Conversely, in companies infected with short-termism, management is “too busy” to deal with issues because there is an urgent “fire” to be put out and everyone is scrambling and pushing to meet a short-term financial goal.
- Do not rob revenues from future periods
One of the hallmarks of a company infected with short-termism is the continuous effort to pull naturally occurring future revenues into the current period. There is no doubt that creating a sense of urgency, rapidly knocking down barriers, and being flexible to customer needs are important tools for sales teams to use when motivating customers to make a favorable decision toward your products. But the tools of short-termism are typically damaging to both current and future operations and financial results. Such tools include promising unreasonable delivery or installation schedules, deep pricing discounts, customized features, or additional service scope in exchange for signing the sales contract now. These commitments are disruptive to the operations staff who have to meet the promises and often sets them up for failure, which can damage the long-term value of the customer relationship.
- Build a sustainable organization and governance structure that will outlast the founder
Companies managed for the long-term develop an organization and governance structure that allows them to grow and transition to new leadership. Companies managed for the short-term never get around to developing the leadership team, creating a board of advisors or directors, and putting into place policies and procedures that will sustain the company through significant growth and possibly transition to new leadership or even new ownership. Companies that invest in a pragmatic governance structure for their size and complexity are more valuable and resilient.
Since you own your business, you get to decide how it will be managed. There is strong evidence that managing for the long-term creates more value over time. In our business culture today, there is increasing pressure, even for privately-owned companies, to make decisions based on short-term impact. Monthly and quarterly results do matter, but step back and consider the long-view as well. By making a few changes in your decision making and approach, you can build a valuable business that is more sustainable.