March 9, 2016

Short-termism is Dead! Long Live Short-termism!

Two competing stories I saw recently about the relentless pressure on companies to meet short-term financial goals:

1) Larry Fink, the CEO of Blackrock, the world's largest investor ($4.6 trillion in assets) sent a new letter to S&P 500 CEOs urging them to think about long-term value creation (He also sent one last year lamenting stock buybacks and other short-term games).

A few choice phrases:

· "Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need."

· "We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation."

· "Over the long-term (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts."

Fink also commented on the macro-economic impacts of our short-term obsession: a lack of investment in infrastructure. That unfortunate political reality, I'd argue, is also due to a rise of an anti-governing coalition in the federal government.

Ok, so far so good -- so the scourge of short-termism in business is finally facing some strong, mainstream opponents. But then I saw this story...

2) "Alcoa CEO: The World is Getting More Short-Term"
Kalus Kleinfeld, Alcoa's chief executive, explains the break up of Alcoa into a core commodity business in aluminum and a "value add" business that sells to aerospace and auto. He makes the case that he needs to separate the high-value business to "have a different investor base" that would care about innovation and growth over time.

We've been hearing this argument more these days, as utilities have been splitting up to separate fossil fuels from clean energy...in part to satisfy different types of investors (although consider NRG CEO David Crane's take on whether short-termism drove his departure from the big energy company).

Kleinfeld isn't super-optimistic on this front, telling Fortune "the whole world is getting more short-term."

So which is it? The end of short-termism or the continued pressure?
Could it be both?

A short-term focus is deeply ingrained in what executives and managers have been trained to do (maximize short-term value) for the last 30+ years. So perhaps we're still heading in that direction...but we're finally slowing the ship and beginning to turn it around.

Fink suggests a solution in a way -- keep giving us quarterly reports and data as a measure of progress along the way to something larger -- like an 'electrocardiogram' of health today vs. a long-term plan for greater health. This seems like a good compromise.

But we clearly need to aggressively ramp up long-term thinking to get them even remotely in balance.

(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.

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