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]

Wall Street and New StreetWhile 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.

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