Modern capitalism is constantly under attack for its rampant short-termism. Investors are obsessed with quarterly results. Chief executives are only interested in getting the share price up for a few months so they can collect their next massive bonus. Investment suffers and the workers are left behind. Hence governments are always trying to come up with new codes, tax breaks or incentives to combat these problems. But is the situation really as dire as critics say?
Patient investors
No one would deny that short-termism is sometimes an issue. But it has never been the whole story. There have always been lots of companies that manage for the long term – and are celebrated by the market. The most famous example now is Amazon, a company that obsesses over customer satisfaction, and which seems hardly to care about making a profit – and yet which is now the fifth biggest company in the world, measured by market value. There are lots of others. Companies such as Unilever, GlaxoSmithKline and Associated British Foods have invested hugely in creating sustainable brands and world-leading products and have been rewarded by the market for doing so. So what is the difference between the companies that get celebrated for long-term planning and those that get punished for it?
Four ways to create space
According to a fascinating new study in the Harvard Business Review, companies can beat short-termism if they want to. The study identified four ways that businesses create space for themselves.
Have a great story to tell
If a chief executive has a compelling narrative, investors will buy into it. If the business is all about conquering new markets, creating new products, or pushing into new territories, and it is exciting and convincing, then shareholders will become enthused.
Be realistic
A company has to be open with its shareholders and not sell them pipe dreams. If the CEO tells them a new product may take a long time to come to the market, or that it may take a decade for a unit to start making significant profits, they are far more likely to be patient.
Create lasting values
The companies that carved out the space to plan for the long term were those that had a unique set of values, ranging from customer service to engineering excellence to research brilliance to staff development. If one or two quarters are disappointing, or if there is a hostile takeover bid from a rival that wants immediate results, management can point to those achievements and argue that the business deserves to be supported because it will pay off in the long term. When Pfizer bid for AstraZeneca in 2014, we could see that at work – and again when Kraft Heinz made an approach for Unilever.
Innovate furiously
It is easier for investors to buy into a plan if they can see that a company is at the cutting edge, introducing a lot of new products, and taking a share of a growing market. Not every business can be as innovative as Amazon. But if it is trying out new ideas, and showing lots of ambition, then it is far easier to overlook a few months of disappointment and believe in its future.
There are endless proposals for creating incentives to encourage more long-term investment. But if this study is right, we don’t need them. Investors are usually happy to buy into long-termism. All they need is for the firm to make the effort to persuade them it’s worth doing so.