Is "Short Termism" Endangering Your Business?
There's been a lot of talk recently about CEO compensation with adjectives like stratospheric and disproportionate getting thrown around. Lawrence E. Mitchell, writing today in Business Week, takes the long view and diagnoses a problem at the heart of the American business system:
"The real culprit is the growing preeminence of finance over operations. It causes stock market considerations to trump those that improve the actual workings of a business. And the quicker the stock payoff can be engineered, the better. Until that changes, don't expect CEOs to stop gaming the system."Mitchell finds the trend worrisome "since an economy grounded in short-term, rapid-fire finance is an economy likely to self-destruct over the long haul."
McKinsey Quarterly recently ran an interview with David Blood and Al Gore on their investment firm, Generation Investment Management, which includes sustainability measures when evaluating investments. In this article too, Gore laments the "tyranny of the three month cycle," and Blood comments:
"We think that the focus on "short termism" in the marketplace is detrimental to economies, detrimental to value creation, detrimental to capital markets, and a bad investment strategy."What's most intriguing is that this criticism was not rooted in environmental concerns -- an appeal to ethics or the fuzzy adorability of polar bear cubs -- but in the language of sound business practice. Environmental degradation, the changing energy picture, and the political upheaval likely to be caused (eventually) by huge income disparities are part of the context in which businesses need to plan. Gore, the environmentalist, and Mitchell, the professor of Business Law agree -- short term focus can lead to long term disaster.
In the end, Blood points out, the goal is to see the larger "context for business as an opportunity for companies to establish competitive positioning, grow revenues, and drive profitability." In the end, the goal for companies (including perhaps yours) is "to seize the opportunities, not just avoid the risks."
(Image of Polar Bear by Grant Neufeld, CC 2.0)