Is quarterly capitalism holding companies back from getting to their next state of development?
This is not a new question nor a new issue in the world of management. Many thinkers have slammed the well-established practice of business leaders doing anything necessary in order to show strong quarterly performance so as to keep the trust (and money) of investors.
Take DuPont (@DuPont_News), the huge worldwide science and technology company with roots all the way back to 1802. Dig into it as a prospective stock, and you will find at least one reference that says the company’s “segments include Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Safety & Protection.” [link]
While I cannot offer any kind of professional investment analysis here, it is clear that — due to quarterly performance — the stock has been pummeled lately. From a high of $76.61 per share, it has dropped to as low as $52.79 per share. It missed its earnings projections a few days ago and lost five per cent of its stock value in one day. That is not unusual. In fact, one can find many examples of Wall Street (and all the other world trading capitals) punishing any company that does not seem to perform optimally each and every quarter.
I mention all this because, when investors pull away from a company such as DuPont, the resources of the company to develop and grow are pulled away also. Capital is the fuel that powers the corporate world, and a company with less fuel will either move more slowly or focus only on products and services with a high profit margin, perhaps focusing on activities that have no sustainable future.
I also mention this because, while management professors and consultants have been widely critical of quarterly capitalism, it’s unusual to find politicians taking stands on such issues.
In the US, for example, presidential candidate Hillary Clinton recently said she would try to move the country away from such short-term investment thinking, mainly by increasing the taxes on those who don’t invest in companies for more than one year. Her comments [see video highlights here: link] has stirred a great deal of new debate on the topic. Since this is a management issue very much at the heart of nextsensing (and, of course, capitalism), I wanted to share my own views.
- While it is politically clever to pit short-termism against long-termism as evil vs good, leaders of companies who must make decisions about their enterprises with lasting strategic implication cannot be coaxed by such an oversimplified choice between the lesser of two evils.
- The fact of the matter is that today´s leaders must manage both the short-term performance of their enterprise and actively participate in the creation of its future simultaneously. This balancing act was not a salient problem for leaders past; but, in today’s fast moving world of discontinuous change, technological intensity and endless disruptive ambiguity, resting on one’s laurels is no long sufficient.
- Management speak and leadership advice has sufficiently framed this dichotomy over the years. Read the writings of Joseph Schumpeter in the 1930s [link] or James March in the 1990s [link], and you’ll get a feel for those who strongly advocated the value of creative destruction (Schumpeter) of companies that needed to die if they could not sustain themselves — or (March) who talked about the delicate balance between exploiting the present versus exploring the future. I could name more. What’s different today is the urgency surrounding the need to establish and sustain a wider range of activities across the continuum of short-term return and long-term opportunity.
- The trouble is that most organisations are set up mainly for the short term, and its leaders are overwhelming incentivised accordingly. When you hear talk (and hear politicians propose legislative actions) to reign in executive bonuses, they are responding to the downside of short-termism with its overemphasis on quick payoffs on invested capital.
- Relatedly, many are raising questions about why some large corporations continue to sit on piles of cash while the cost of capital is at a record low and the opportunities for return have never been more promising. In fact, the buying back of one’s own stock is being done at unprecedented levels and is often cited as more evidence of the dominance of short-termism.
To my last point, please make it a point to read a short article by Davey Alba (@daveyalba) on Wired’s website [link]. Consider her words while you’re thinking about the endless headlines and news stories about Greece potentially going bankrupt:
We know from the company’s latest balance sheet that Apple has about $194 billion in cash and cash equivalents. In other words, Apple could have bailed out Greece twice and still had $2 billion left over. If Apple were a country, and its cash pile was its gross domestic product, it would rank No. 54 on the list of richest nations in the world, according to the latest data from the World Bank — richer than New Zealand and Vietnam, and creeping right up to Romania.
The Nextsensing Project agrees that we need to think in new ways about the very essence of how organisations create value. We advocate, first, that you should generate aspirations beyond any activities currently undertaken by your firm. And then, you should systematically and continuously challenge the status quo. We believe that both of these emphases will contribute to a better way of thinking about both the present and the future competitiveness of all organisations, thus helping to drive wider thinking of entire economies — and, in time, even the capitalist system itself.
Life is about renewal. Corporate life should be the same. Renewing companies such as DuPont seems to be the right thing for society’s stakeholders, and not just the short-term returns of shareholders. DuPont would not have survived 200+ years if it still did only the same things it did in 1802. Like every firm in the capitalist system, DuPont shares the double duty of managing its current value-creating activities while also imagining the path to future streams of value.
Thinking differently about the future is more than a policy speech for a US presidential candidate. It needs to become an enduring value of any leadership team that aspires to lead its organisation toward a sustainable future.