Why quarterly capitalism exists
Usually, there is a natural conflict of interest between investors, founders, employees and executives. Far more often than not, when the company becomes public, the founders already sold the majority of their shares, and they can not influence long-term company strategy anymore or indeed pursue the original mission statement. Consequently, a company becomes a “cash-cow” that is utilised in full by various investors until it becomes very risky to continue. However, before it happens, investors should be able to gain money and reinvest into new emerging companies.
Those money-making machines need to be watched very carefully, like any other machinery working on the edge of their capacity. Losing focus can determine the fail of the investment campaign as it simply might be too late to withdraw the capital from the “dead horse”. For that reason, investors are strictly monitoring financial performance, usually in the scope of one quarter to make sure they are not missing the very first signals when the company is about to die.
Long-term vs short-term performance
Multiple studies recently demonstrated that businesses employing long-term strategy retain numerous benefits, including superior financial performance, stronger fundamentals and resilience to a crisis, they also add more to economic growth.
However, the reality is that more and more companies not only seek to use short-term strategies, the average company life cycle becomes shorter every decade.
Surveys consistently show that executives are facing pressure from short-termism. For example, a recent study held by McKinsey Global Institute says that 87% of executives experience the pressure to deliver impressive financial performance within two years, 65% say that short-term demand has increased over the last five years and 55% say they would delay a new project to hit quarterly targets even if it sacrificed some value.
It is a dangerous flag, and corporate short-termism already caused several economic crises and added to the volatility of the financial markets, breaking the trust between business and broader society.
Can companies innovate under short-term pressure?
Apparently, the answer is – “yes, but only to a certain degree”. The limitations are undeniable. Significant innovation these days requires many components, such as technology, data insights, talent and extensive support from the top. All of the ingredients mentioned above require time and resources and financial investment, not to mention focus and commitment.
Then again, traditional R&D departments have certainly disregarded the trust of the boards as sometimes they are so detached from the reality of the business that ROI is remarkably low or even negative over the entire innovation life cycle.
As we never know what idea can disrupt the market, there should be several teams working in divergent directions. This approach requires significant resources – both financial and talent, so only established and stable businesses can potentially afford it. Usually, ROI on one or two most impactful ventures will repay the investment on the whole initiative.
Organisations of the future
Current trends are clearly showing that traditional management hierarchies can not effectively deliver value to consumers within the short timeframe due to the complicated and delayed decision-making processes.
One of the possible ways to innovate under short-term pressure would be super agile small multidisciplinary teams that work on one specific product/service idea over a limited timeframe (not more than one quarter) and demonstrate an absolute commitment to go to market within this timeframe and then commercialise the effort. The team should act pretty much like a startup, having all the entrepreneurial mindset people onboard who are capable of producing a full product/service lifecycle and relying as little as possible on the core business infrastructure.
How to release investors pressure?
Short-termism represents a complex problem, so is the solution which demands consolidated efforts on multiple layers. Those layers include not only institutional reforms, governmental incentives and regulation, but also raising informational awareness and tailored decision-making tools.
Fortunately, with the increasing awareness of this challenge, the issue of short-termism is starting to gain attention from numerous global organisations, including the Aspen Institute, the Coalition for Inclusive Capitalism and the McKinsey Global Institute.
There are different investor types – some of them are incredibly short-term focused. Over the last few years a new kind of investor emerged, such as impact investors. They aim to target not only a welcome financial return but also social and environmental impact. Usually, those investors are interested in long-term company performance and the so-called triple bottom line. Should we say that those two categories are probably the extremes and therefore we can find a lot of in-between scenarios?
So here in lies the challenge for the CEO – how to deliver the proper message to the stock market targeting the right investor type and thus potentially loosing the trust of other less preferred investors. Clearly, the decision requires a lot of deep thinking and alignment with the company mission.
Tangible and intangible assets
Traditionally, companies report only tangible assets and investors can compare one opportunity with the other only using financial metrics. Something else that might encourage investors to move from short to longer-term investment strategies is the understanding of how intangible assets can generate more profit in the long run. There is no unified way on how companies compare intangible assets such as talent, organisational culture, innovation, consumer trust and even quality of board leadership. Developing the tools and frameworks to measure the dynamics of intangible assets and how this affects financial results, in the long run, would add more confidence for those who decide to play the long game.
Additionally, the United Nations Sustainable Development Goals program encourage governments and businesses to contribute to a more sustainable future, and this potentially will affect new government regulations and incentives. Ignoring this fact would be presumably risky for any business, so earlier the companies can align their vision with the UN better for them.
Barriers to overcome
Shifting investors and executives mindset, adopting new tools and measurement frameworks require much time. The good news is that the process of change already started, a significant part of the investors’ community realised that adhesiveness to the conventional ways of achieving financial results is dangerous, and the different strategy is required.
However, even when we can eventually overcome high-level barriers, it will be much more work within the organisations to make sure that middle management is supporting the shift in the appropriate direction.
People typically resist change, even if the change is for the better. That is human nature, and we need to work as a broader group of leaders on every level inside the organisation and outside to create a compelling narrative and measurable results to support the movement towards the long-term sustainable future for the economy, business and the planet.