Building a reputation or hitting KPI's?
This month, McKinsey & Company released the discussion paper ‘Measuring the economic impact of short-termism’. McKinsey concluded in this paper the following:
- Short-termism is increasing
- Long-term companies deliver superior financial performance
- Long-term companies continue to invest in difficult times
Figure 1: Executives feel the pressure from short-termism
Source: Rising to the challenge of short-termism, FCL Global, September 2016
*) percentage of executives and directors feel most pressured to demonstrate strong financial performance in two years or less.
**) percentage of executives and directors say short-term pressure has increased over the last five years.
***) percentage of executives at companies without a strong long term culture say their company would delay a new project to hit quarterly targets even if it sacrificed some value
The report also concludes that CEOs know that long-term success is better than short term, but that by environmental factors, such as shareholders pressure, they’re forced into short-term success. Almost 90% of all executives and managers feel the pressure to perform financially within two years or less. Indeed, the short-term pressure has increased over the last five years, according to 65% of executives and directors. But it is precisely the companies that have a strong long-term culture, which are able to make short-term goals in the form of specific projects, for what they are (55%). Thus, they are able to put better financial performance in the long term.
The three major areas prone to various degrees of influence are society, turnover, and employees. The impact of the first component, society, is increasing as high-level, socially friendly businesses appear in the banner. The second component, turnover, is still by far the largest and has to endure the most pressure. Companies — especially listed companies — are created to generate revenue and profit and maximize shareholder value. The senior managers judged on their KPI performance are influenced by the CEO, whose decisions, actions, and inactions are influenced by the executive and supervisory boards as well as company shareholders. Consequently, the pressure on the turnover component is particularly great. The third component, employees, gets relatively little attention. The best companies know how to estimate the value of the component ‘employees’ in their attempt to find the right balance between society, turnover, and employees.
So, even if we know that a long-term vision is better than short-term success, as a whole, we have been unable to achieve this. Changing human behavior is ever troublesome, but global trends such as the shift of economic power from West to East and technological advances will put more and more force upon us to follow the right path. Will we, as a society, eventually come to understand that a long-term vision is the only right one? Let's hope so. Only if we recognize these global mega trends for what they are and what they will mean for our society, we will recognize that a long-term focus is the key to success. And in order to unlock society’s potential, we’ll need to put our employees first. They are the ones who will show the creativity to use technological processes to its full potential and will make our CEO’s capable of achieve lasting financial success.
Clearly the potential in the market is there: we're just out one of the worst financial economic crisis since the Great Depression and consumers are slowly, but surely ready to spend to spend their money. They're eager to use new products and services and, as a result, we as a society should be more patient. Just listen to the view of Richard Speetjens (Robeco) on consumer spending and the type of brands he sees as the future.