Published in 2018 by Wharton Digital Press of the University of Pennsylvania’s Wharton School, Go Long: Why Long-Term Thinking is Your Best Short-Term Strategy brings together expert voices from Korn Ferry, Fortune magazine, The Wharton School and McKinsey & Company to make the case that CEOs should adopt a long-term mindset and pursue long-term strategies as an alternative to the common corporate focus on short-term results—a focus that often comes at the expense of future growth.
With powerful anecdotes from industry leaders who chose to go long, the authors present a compelling argument, spelling out the pitfalls of short-term thinking against the wisdom of a long-term vision.
Co-author Rodney Zemmel is Managing Partner for the Northeast (US) at McKinsey & Co. “I spent probably my first ten or 15 years with the firm in some of the most long-term focused industries around, which were pharmaceutical and biotech R&D,” he says. That perspective informed Zemmel’s work on Go Long. “What I realize and what our firm has realized over the last few years is there is an increasing challenge with companies that feel pressured to make decisions that are good for the short-term and aren’t necessarily in the long-term interest of the company.”
Go Long identifies “a mountain of evidence that suggests many American investors are putting enormous pressure on CEOs to make a quick buck.”
A short-term focus has long been on the rise, and Zemmel identifies some of the metrics that point to that greater short-term focus. “When we see increasing, rapid turnover of CEOs and other executive roles and shorter holding periods for stocks, we recognize that more and more business leaders feel as if they’re being forced to make short term choices.”
For example, an analysis published by the Harvard Law School Forum on Corporate Governance and Financial Regulation in February 2018 found “Of all CEOs who were serving at the end of 2017, 38.1%—or 192 executives—had been in their current position for a handful of years or fewer.” And citing data from the New York Stock Exchange, the authors of Go Long found “the average holding period for public stocks has dropped from 5.1 years in the mid-70s to 7.3 months today.”
Among the firms we identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively.
Where does the short-term pressure come from?
The growing role of institutional investors with a short-term investment horizon weighs on CEOs. From the Introduction to Go Long, “Top executives today are feeling squeezed by activist hedge funds and institutional investors who are constantly pressuring them to boost quarterly earnings, increase dividends, and buy back shares—all at the expense of future growth.” And Zemmel adds, “there are now 3-4X more hedge funds than there are U.S. public companies.”
Many executive compensation packages reward short-term measures. And sometimes the pressure on CEOs comes from within. Zemmel and his co-authors cite a survey conducted by the non-profit organization Focusing Capitalism on the Long Term (FCLT) that found nearly two-thirds of CEOs felt short-term pressure from their own boards and executive teams.
The demand for short-term earnings, dividends and buy-backs that reward investors that can come at the expense of the company’s long-term investments is by no means universal. According to “The case against corporate short termism” by McKinsey, investors may not be so myopic. “Only three of the 24 investors on our panel thought it was important for companies to consistently meet or beat consensus estimates for revenue or earnings. Most said that they were satisfied with a company sometimes beating estimates and sometimes missing, as long as the company was making progress toward its long-term goals.”
Why Think Long-Term?
To be fair, there are arguments for a short-term mindset, Zemmel says. “I’ve heard an activist investor very passionately argue that there is no action a company can take that is good for the short term, that isn’t also good for the long term, and that the long-term really is the sum of successful short-terms. That is certainly an intellectually valid point of view. But as we look at decisions around making R&D and capital investments versus just maximizing short term financial results, you can see companies making decisions that are right for the short term but wrong for the long term.”
Go Long argues that shareholders do benefit from a long-term approach. Research by McKinsey published in 2017 compared the performance of short and long-term focused companies. “Among the firms we identified as focused on the long term, average revenue and earnings growth were 47 percent and 36 percent higher, respectively, … and total return to shareholders was higher, too. The returns to society and the overall economy were equally impressive. By our measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015.”
So how can CEOs get investors on board with a long-term strategy? Zemmel says, “When we talk to investors—including the big index fund holders—they almost all talk about their desire to really understand a company’s long-term strategy and the real progress against that strategy.” He says, “It’s interesting, when you ask CEOs, CFOs and business unit leaders what’s driving the short term pressure, investors are normally near the top of that list. But then when you talk to the investors they say ‘we get concerned when we see companies taking short term actions, and we wish we had more dialogue around the long term strategy.’”
Zemmel recommends enhancing communication. “Not just the quarterly financial numbers update that will keep all the analysts happy as they update their models, but actually having a conversation about ‘what is the strategy? Where are we against the performance and health metrics for that strategy and how are we making a difference?’ The CEOs and management teams who can do that clearly with investors, clearly with external stakeholders and very clearly within the company will have a lot of success.”
The Case Studies
David Rubenstein, co-founder of the global private equity firm The Carlyle Group, wrote in the foreword to Go Long “Perhaps most famously, the Wall Street herd derided Amazon’s lack of concern about near-term quarterly earnings. Jeff Bezos, the company’s CEO, ignored analysts’ demands for short-term earnings. The result is well-known. Amazon became one of the world’s most valuable companies—and Bezos the world’s richest man—in large part because of his focus on producing earnings not in the next quarter but five, ten, and 20 years down the road.”
Zemmel and his co-authors examine six bold examples of leadership that illustrate what it can take for organizations to go long. For example:
Six Examples of Bold Leadership
Alan Mulally stared down an anticipated $17 billion loss and rebuilt Ford Motor Company with laser-like focus on principles, practices, shared goals and a commitment to all stakeholders.
Larry Merlo led CVS in an exciting new direction after he directed their stores to stop selling cigarettes—at a cost of $2 billion in annual sales revenue—in order to become a legitimate health company.
Sir George Buckley turned 3M around by creative reengineering and aggressive investment in R&D and an innovation culture.
Paul Polman, CEO of Unilever, was so committed to the long-term that he stopped reporting quarterly earnings and turned his focus to creating a long-term, purpose-driven organization.
Ivan Seidenberg stepped in at Verizon and made massive and successful capital bets around next generation technology, resisting tremendous investor pressure.
Maggie Wilderotter is pioneering a new model of corporate director, engaging directors and executive teams on long-term growth strategy and selling those strategies to investors.
The common denominator among these leaders and others like them is that they set their sights far beyond the next quarterly report.
Long Story Short: It's about Leadership
Regardless of where in the world a company operates, Zemmel’s advice about long-term thinking is the same. “It’s essential to have a long-term strategy, and it’s essential to have a board that really understands and spends time on the long-term strategy.” Zemmel says, “Companies really can win by focusing on the long-term. It’s not just a cliche, there is real evidence for it. Investors aren’t the only source of the pressure, it’s actually self-imposed management and board behavior, and the way to break out of this is leadership.”
What kind of leaders can make that break? “Leaders who understand the opportunites and the challenges, have the insight to create long-term strategies, the courage to steer their companies in the right direction, and the communication skills to get their companies and the investor world excited about their future.” Zemmel adds, “The most important thing is talent.”
Book Excerpt from Going Long Works: Why Long-Term Thinking is Your Best Short-Term Strategy
Adapted from Go Long: Why Long-Term Thinking Is Your Best Short-Term Strategy, by Dennis Carey, Brian Dumaine, Michael Useem, and Rodney Zemmel, copyright 2018. Reprinted by permission of Wharton Digital Press.
There are many ways for CEOs to go long. Different industries have different time horizons. A high-tech firm might have a two-year cycle and a pharmaceutical company a 10-year cycle. But as Amazon CEO Jeff Bezos reminds us, you have to think longer term than your competitor. If everyone else is planning three years out, you can gain a great advantage by thinking seven years out.
We have found that there are four broad, basic principles that any CEO who wishes to adopt a long-term strategy can follow.
1. Develop a Purpose Greater Than Profits
Long-term financial goals and metrics are necessary but not sufficient for success. CEOs must find a purpose that motivates employees.
Unilever’s Paul Polman decided to seek a purpose greater than profits—the alleviation of poverty and a zero carbon footprint. To do so, he created a business model that takes other constituencies into account. This means injecting Environmental, Social, and Governance (ESG) issues directly into the company’s DNA. It means running a business profitably but also making sure employees, customers, suppliers, and the community at large benefit from the corporation’s activities. The purpose must be integrated into the organization’s day-to-day operations, with hardheaded metrics to track progress. This formula works. Unilever’s stock over Polman’s tenure has handily outperformed that of its peers.
But this is not the only way to manage with a long-term purpose. For some CEOs, ESG is not an end unto itself but rather a healthy by-product of their company’s long-term strategy and investment decisions. When CVS Health CEO Larry Merlo took a huge gamble by dropping cigarette sales—a move that cost the retailer $2 billion in short-term annual revenues—he sent a clear and convincing message to his employees, customers, and investors that the company was dead serious about becoming a leading healthcare company by helping people lead healthier lifestyles. The move helped CVS sign up more hospitals, health plans, and other healthcare customers, driving growth in that segment of its business.
2. Pound Home Your Strategy to Investors
Any CEO who wants to avoid becoming a target must think like an activist and cut costs or sell off businesses before the activists do it for them. This means creating a long-term strategy that promises to pay off far more than simply cutting costs and returning the cash to shareholders.
As we learned from Hewlett Packard Enterprise director Maggie Wilderotter, CEOs who want to go long should seek out the wisdom and backing of board members who deeply understand the company’s strategy, can engage in give-and-take with the executive team, spend sufficient time to solve difficult problems together, and show mutual respect for one another. To help crystalize a new long-term strategy for HPE, the board composed a letter to management as if an activist had written it.
To keep activists away, CEOs need to formulate a clear and compelling business case that the board and their long-term investors can back with enthusiasm. When doing this they need to remember that not all investors are alike. Short-term traders won’t have your back but plenty of long-term investors will if you can reach out and persuade them to take the journey with you. The growing influence of index funds—which now represent a large and growing share of the US equity market and are by definition long-term investors—means that there are influential players in the market who want CEOs to manage for the long term, as do many of the pension funds and university endowments that entrust their money to such funds. The challenge is to clearly articulate your strategy, explain it clearly and consistently to board members and long-term investors, listen to their advice and always keep them in the loop.
3. Measure Long-Term Success
Any CEO who wants to achieve healthy long-term growth must have a clear way to measure progress amid at-times huge capital investments.
Verizon CEO Ivan Seidenberg spent $150 billion on building his wireless and broadband networks. He told his investors that his long-term goal was to create the best products and services in the telecommunications industry. He then picked a clear, easy-to-understand metric as a defining element of long-term growth. Seidenberg chose market share growth—because it provided strong evidence that consumers wanted his products—to show his investors that his long-term strategy was on track, quarter after quarter, year after year.
Of course, every market is different. It makes sense to also track metrics that cover both performance and health. These include, but are not limited to, levels of customer satisfaction, employee engagement, and degree of growth from new products.
4. Create a Culture Focused on the Long Run
CEOs need to develop a team that’s open enough and trusting enough to do what it takes to build products and services people want and improve productivity every year. Getting people to focus on the long term helps everyone make the right decisions for the short term. That means fostering a culture that is brutally honest about what’s working and not working.
3M’s Sir George Buckley created a culture where people felt they were not only supported by the executive team but also felt safe to take risks and fail. He did this by green-lighting R&D programs that his scientists and engineers had thought to be promising but had sat on the shelf during the previous regime, encouraging them to take big risks, and, notably, not punishing them for failure. Over his tenure Buckley grew the share of new products that had been launched in the previous five years from 8% of sales to 34% of sales.
Successful CEOs don’t go long for the sake of going long. It’s what a company gets from acting long term that matters. Long-term companies can outstrip competitors and position themselves for a bright future 5, 10, or even 15 years out. And we’ve seen from CEOs who had the courage to think long that they created jobs, pleased customers, made their communities richer, and, of course, made their shareholders richer.