The need for instant results is everywhere. We only have time to read articles giving us six top tips, we want to get fit in just 10 minutes a day, and football managers must turn around a club in a handful of games. In reality, achieving fundamental objectives takes effort – and time.
We see similar impatience in our organisations, showing in the constant push to increase revenues and profits with every quarter. Yet short-term profit does not automatically translate into shareholder value. Neither does short-term success equate to sustainable, long-term results.
Our obsession with short-term focus can create many corporate ills. Continually discounting tickets to ensure a full boat or plane might bring short-term profits. But, over time, the strategy may well erode a company’s reputation and brand. Exploiting a technological advantage in a market where you have a captive audience may bring bonanza profits. But high prices and poor service will drive customers elsewhere when competitors move in.
Relentlessly chasing short-term profits disconnects an organisation from its core purpose. It distracts a company from developing a deep understanding of its markets and stops them from innovating to retain a competitive edge.
At worst, short-termism drives companies into liquidation
The promotion of financials above all else means a company fails to devote resources to the human elements required for sustainability: leadership, teamwork and culture. All of these are essential to deliver results in the present, while adapting quickly to the future.
Organisations who fail to hit their quarterly targets often chase them harder, accelerating a race to the bottom. Think of Kodak, which developed the world’s first consumer digital camera, yet battled through Chapter 11 bankruptcy in the US thanks to a reluctance to kill the golden goose of film.
Another case is travel agent Thomas Cook, a business forced to renegotiate its debts when hit by the eurozone crisis, unrest in the Middle East and Africa, and flooding in Thailand. Harriet Green, the now ex-CEO of the company, led its initial transformation and suggested it could take six years. “You can’t do a transformation on this sort of scale in a year or two years,” she told an Inspiring Women conference. She quit after just two.
At worst, short-termism drives companies into liquidation – like Comet, Jessops, HMV, and similar casualties of the last recession.
Organisations need to make money to pay a return to investors while enabling the company to grow. A better balance of focus is needed so an organisation can deliver today while still maintaining its relevance in tomorrow’s world. Pixar Animation Studios has a business model that achieves this. The company recognises the potential of talented people and it invested in innovative ways of fusing art and technology, doing it in a way that made such financial sense that Disney bought the company.
Unilever is proud of its business model, designed around sustainable growth. When Paul Polman, CEO, was criticised for missing sales targets, he said: “We would be a hostage to the financial market if we ran this company judged on expectations”. In January, Polman dished out his own criticism: “Profit is not a purpose, it’s an end product. I always want a deeper result.” Meanwhile, the Unilever share price has tripled since 2009, showing that the long-term approach can appeal to investors.
In fact, a recent survey by McKinsey estimated that at least 50% of an organisation’s long-term success is delivered by having strong “organisation health”, a term McKinsey uses for a people- oriented approach.
In this uncertain market, organisations that have a clear purpose and invest in people so they can adapt to, and deliver, change will have a competitive advantage. This will deliver real shareholder value.
As Jim Collins, author of Good to Great, said: “Enduring companies don’t exist merely to deliver returns to shareholders. Indeed, in a truly great company, profits and cashflow become like blood and water to a healthy body: they are essential for life, but they are not the very point of life.”
Pioneering animator Walt Disney put it a different way: “I don’t make movies to make money – I make money to make movies”.
Sarah Wicks is the managing director of New Road Consulting