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Combating Short -Termism - and Managing for the Long Run

Danny Miller and Isabelle Le Breton


The last decade has seen a steep decline in the credibility of corporate America.  Enron, Worldcom, Andersen, Tyco – the names are enough, as they conjure up images of greed and dishonesty.  But the more fundamental story here is the rise of short-termism. We read so often now of ill-conceived acquisitions, disastrous bouts of downsizing, rampant social violations, and a disdain of far-sighted investments in people, quality and innovation.  Small wonder, when we look at the pressures on top executives.  Over the last two decades, the stock-price-based incentive component of CEO compensation has soared from less than 30% to over 80%, and CEO tenures have shrunken from almost ten years to less than four.  In other words, “hit those quarterly numbers – or else”. 

Happily, short-termism is a combatable disease
In a recent book, “Managing for the Long Run” (Harvard Business School Press, 2005) we describe a collection of companies that are quintessential long-term managers – where time horizons are decades not months, and accountability is not just to shareholders but all stakeholders.  All are family businesses in which a value-driven family cares enough to do the right thing, are willing to sacrifice accordingly, and are masterful competitors.  These 40 firms have led national or global markets for 2 to 10 decades, and average 104 years in age.  All have revenues of over $1 billion.

They are not so atypical of their breed
Studies have found that family businesses tend to outlast other companies by factors of two or three, and outperform in market valuations and returns on assets. 

So why the out-performance? 

First, some words about what we did NOT find.

  • A focus on quarterly numbers.  The attitude was that earnings and sales would take care of themselves if the firm delivered on a market-relevant mission.
  • Emphasis on competitive analysis, grand strategizing, or much study of the best practices of other companies.  Firms were more focused on doing something unique rather than copying.
  • Major changes in strategy, initiatives towards unrelated diversification, downsizing.
  • Sophisticated organizational structures.  There were few tiers in the hierarchy, little bureaucracy, and a reluctance to track closely the performance of small parts of the company.  Instead the emphasis was on the substantive achievements and health of the whole organization.
  • Charismatic leaders.  CEOs had little interest in drawing attention to themselves.  Nor did we find any lavishness in the lifestyles, perks or compensation of most top managers.
  • Gamesmanship or confrontation with stakeholders.  Cooperation was more common.
  • Attention to shareholder PR, market analysts, or the stock price of the company (and 50% of our firms were publicly traded).

What we DID find: "All our best companies were dominated by the same theme and approach: “managing for the long run”.  The “four C priorities” of that management philosophy follow:

  • Continuity: Our winners favored a substantive mission, not a dollar-driven strategy.  They invested deeply in focal competencies; and built these cumulatively over a sustained period (at Corning and Tetra-Pack, investment sometimes started 10 to 20 years before payback time).   Firms also fostered long executive apprenticeships and tenures to match these investment time horizons.
  • Community: These firms also embraced strong values, were super-choosy in people selection, hired very sparingly, trained and mentored deeply, and were unusually loyal and generous to employees -- often to free their initiative and fight bureaucracy.  S.C.Johnson had the first pension plans, avoided layoffs for over a century, and consistently out-paid rival P&G.  But they insisted that everyone buy into the values of the company.
  • Connection: Our companies favored long term, win-win relationships with external stakeholders over bargains and transactions -- especially with customers, suppliers and partners.  IKEA rebuilt the plants and redesigned the processes of its suppliers.  Bechtel has worked with some of their clients and suppliers for over 50 years, Corning and Michelin for over 100.
  • Our fourth component is Command:  The first three priorities could only be realized via governance: that is, if executives and boards had the freedom, knowledge & incentive to invest for the long run.  Our family executives had the clout to stay in power, the benefit of years of apprenticeship and learning, and the future reputations, fortunes and careers of their children at stake.

Managing for the long run represents some really important challenges -- and opportunities.
The challenges come from American and foreign -- especially Asian -- businesses, that DO manage for the long run.  How can firms with a short term time horizon even begin to vie against those whose long run orientations give them deeper capabilities, lower costs and more loyal stakeholders? 
 
But there are opportunities as well
Jeff Bezos at Amazon.com and Steve Jobs at Apple have been out-innovating rivals year after year with their far-sighted management.  A long run approach also opens doors to huge foreign markets like China – where relationships only materialize from lots of patience and up-front investment.  Finally, the long run approach has proven itself again and again, in superior financial returns and valuations, as well as the tried and true investment strategies of people like Warren Buffet, Ben Graham, and Peter Lynch.

However -- nothing will happen unless investors, boards and top executives are given the incentives and metrics to take a longer-term approach – and begin to assess performance along numerous substantive indicators.  Executives must act as stewards, not careerists.  Their concerns must become the long-run interests of all stakeholders, not just shareholders but employees, clients, partners, and society at large.  It is truly a blessed paradox that shareholders, ultimately, will gain the most only when these other interests are taken care of.  Here is a happy situation in which traveling the high road benefits everyone – in time. 


About the authors:

Danny Miller is President of Paradox Learning Resources and Chaired Professor in Strategy and Family Enterprise at HEC Montreal and the University of Alberta.  He has authored six books and over 100 articles, and has held professorships at McGill University and the Columbia Business School.  He consults with Fortune 500 companies, and has directed major thought leadership projects for several international management consulting firms.  His practice and current research concerns how firms can develop sustainable competitive advantage by expanding their time horizons and changing their strategies, metrics and incentives.

Isabelle Le Breton-Miller is President of OER, Inc. in Montreal, a strategic and organizational management consultancy, and Senior Research Associate at the University of Alberta.  Her recent book (with Danny Miller) is “Managing for the Long Run” (Harvard Business School Press, 2005), which has been chosen by JP Morgan Chase as one of the 10 “must read” books of 2005.  It is to be translated into five languages.  Her practice and continuing research focuses on how firms can better design their organizations to manage for the long run.


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