Wednesday, August 30, 2020

Short-term Myopia

The focus of many businesses today—because, sadly, most shareholders require this—has turned away from the long-term strategies that they need to thrive and grow. Instead, they focus on analyzing quarterly performance: Trying to anticipate the next quarter’s results and match them to expectations that are usually based on simple demands for “more,” rather than sensible objectives tied to recurring business cycles.

A recent survey of more than 400 financial executives reported that 80 percent of the respondents said that they would decrease discretionary spending on such areas as research and development, advertising, maintenance, and hiring in order to meet short-term earnings targets; and more than 50 percent said they would delay new projects, even if it meant sacrifices in value creation. (“Mapping the Terrain” survey, Business Roundtable Institute for Corporate Ethics, 2004). As a joint report by the CFA Centre for Financial Market Integrity and Business Roundtable Institute for Corporate Ethics, says:
Although the creation of long-term company value is widely accepted as management’s primary responsibility, this research suggests that managing predominantly for short-term earnings expectations often impairs a manager’s ability to deliver such value to shareowners.
The press release for the report summarized their findings like this:
The obsession with short-term results by investors, asset management firms, and corporate managers collectively leads to the un-intended consequences of destroying long-term value, which decreases market efficiency, reduces investment returns, and impedes efforts to strengthen corporate governance.
“Short-termism” isn’t new or unusual. It’s the natural response of anyone whose horizons are narrow and limited. The opportunist, the confidence trickster, those out for all they can get, none of them have ever shown any interest in something that requires you to wait before reaping a reward. All have an essentially short-sighted view of the future.

Businesses, and the executives who run them, want to win. But the perception of winning depends entirely on what you take to be success. Is it claiming victory in the next skirmish, or winning the war? If you have never developed patience, or see it as unimportant, the very notion of waiting into the future to claim success seems impossible. You want to win now, and to hell with what might happen a few years down the line.

If you have never developed patience, or see it as unimportant, the very notion of waiting into the future to claim success seems impossible.
This, I believe, is the key to understanding why business today is so myopic about current returns. It isn’t that there is no credit to allow firms to continue to trade while waiting for future pay-offs. It isn’t even that investors are eager for money in their hands today, not promises for tomorrow. It’s the viewpoint organizations and executives are taking on the future: a short-term viewpoint based on winning today, where no one is ever seen as better, or worse, than their latest set of results.

Of course, people who think like that are usually easy prey for wiser, more patient competitors. They can be lured into traps baited with short-term success and pulled off course, or set up to fail. In a sense, they destroy themselves because of their eagerness to grab at every trifling prize, while missing the big ones that are waiting outside their limited vision. How have Japanese car manufacturers risen to dominate the market? Mostly, I think, by steadily following a long-term strategy of providing ultra-reliable, high-quality, often rather boring models. Their American and European rivals tried to deliver a series of quick knock-out blows, based on being fashionable and trendy, but missed the dull stuff about quality and reliability. A car that turns heads is attractive, but not if it is constantly causing problems and running up repair bills at the garage.

Leadership—real leadership—is another dull, long-term activity. Anyone can try the trick of being a Hollywood-type leader, leaping into action at the drop of the Director’s arm and blazing away at the enemy. Sometimes it will work, short-term. But every time such leaders grab for their six-guns and strike a John Wayne pose, they run a danger that Hollywood never includes in its scripts: the danger of being shot down by the enemy. To keep his or her star status, the short-term leader has to win every single shoot-out. One failure can be enough to end their career for good. Imagine the pressure that puts them under and the risks they must take every day to stay ahead.

Perfection is a terrible taskmaster. As a goal, it is doomed to failure.
Perfection is a terrible taskmaster. As a goal, it is doomed to failure. Those with a long-term perspective can endure defeats and setbacks with calm resolve. No one likes to lose, but for them it is the winning of the war that counts, not the outcome of some individual battle. Most of today’s hugely successful companies have been through hard times and been written off by pundits with no criteria beyond immediate results. Just about any great leader you can name had periods of failure and impotence. It’s how the world works.

You can rush about all you like; work 80-hour weeks, and take your BlackBerry to bed with you at night; near kill yourself with constant effort and striving, but you cannot produce perfection by doing so. If you set the standard for success as meeting every short-term goal, you are condemning yourself to fail sooner rather than later. However hard you work, nothing will change that.

So why not slow down, make a better life for yourself and those who work with you, and accept that human beings fail and stumble, but those among them who keep their eyes on the long-term may still come out ahead?

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