The following is an excerpt from "Long-Term Thinking in a Short-Term World."
Long-term thinking is catching on. On 26 November 2010, Unilever announced that it would begin to release its earnings figures semiannually, not quarterly. Two years later, the share price was 35% higher than its pre-announcement level.
Although short-termism is coming under scrutiny these days, acting long term remains difficult.
Here, NBS outlines how to address the barriers to long-term thinking. Practitioners at all levels and across all industries can use these steps to make the case to integrate long-term thinking into decision-making.
1. Address the Desire for Sure Returns
Managers discount the value of projected costs and benefits on long-term projects because the future is uncertain. To build the business case, try alternative approaches. Most importantly:
- Explain the logic, even if you don’t have supporting numbers.
- Explicitly incorporate different horizons into your decisions. If nobody has discussed long-term implications, raise them during an appropriate conversation.
- Include interim indicators to help assess progress. Make sure those indicators recognize expected timelines for payoffs.
When we were considering renewable energy, we sat down with a leading provider in this space, Bullfrog Power. This partnership has helped us create healthier environments in the communities that we live and work in, and has contributed to LoyaltyOne being recognized as a leading green employer.
— Jeremiah Brenner, Manager, Corporate Responsibility, LoyaltyOne
2. Address Organizational Incentives
Company structures often push people toward short-term action. Advocate for:
- Performance evaluations that reflect the longterm and are used to compensate executives.
- Better designed stock options. If vesting and exercisability of options are separate, and exercisability conditions are longer, managers can’t cash out after just a few years.
- A flatter company. Companies with fewer levels have less pressure for short-term growth (Barton et al.).
Our top management’s stock incentive program requires their shares be subject to a holding period of four years. I think this helps encourage and reward long-term thinking by creating personal accountability.
— Carles Navarro, President, BASF Canada Inc.
3. Address Human Nature
People, including managers, naturally focus on the short term. But companies can act to reinforce longterm perspectives.
- Through communication, help others understand the long-term approach. Provide a vision and specifics. Be open about success and failure. Listen and debate alternatives: discussion leads to a better sense of future opportunities and threats and improves decision-making.
- Provide training and workshops in areas such as backcasting that help leaders focus on truly long-term goals.
A hundred decisions are made every day, and people make them based on their gut according to the culture.
— Richard Chartrand, Executive Director, Electronics & Energy Business Group, 3M Canada
4. Address Investor Pressure
Investors often receive the blame for short-term pressures. However, companies can work with investors and other stakeholders to change the time horizon.
- Educate stock analysts about metrics for assessing the organization’s long-term health as well as the next quarter’s earnings. Advocate for a requirement that earnings guidance predict profits for the next quarter, year and five year period.
- Develop trust with customers. They will identify desired product improvements and may demonstrate greater patience in waiting for the organization to provide them.
- Develop a lasting relationship with suppliers through trust and an emphasis on mutual benefits.
- Consider working with other businesses and regulators. Regulations may be necessary to help everyone adopt the longer horizons that would have eventual performance benefits.
Tools for Valuing the Long Term
- The Balanced Scorecard adds strategic non-financial performance measures to traditional financial metrics. (http://balancedscorecard.org/Resources/About-the-Balanced-Scorecard)
- Corporate performance statements replace traditional income statements. Key enhancements include: identical treatment for capital expenditures and R&D, distinct reporting of medium- and high-uncertainty accruals, and estimates of the value of each under most likely, optimistic, and pessimistic scenarios.
- “Pricing the un-priced.” This approach converts qualitative assessments into quantitative forms that can be compared alongside traditional numerical analyses.
- Research quotient (RQ). This approach includes R&D spending in the formula for predicting output from capital and labor (the formula can be challenging to calculate).
Barton, H., Brown, D., Cound, J., Marsh, P., & Willey, K. 1992. Does top management add value to investment decisions? Long Range Planning, 25(5): 43–58.
Bansal, P., & DesJardine, M.R. 2014. Business sustainability: It is about time. Strategic Organization, 12(1): 70-78.
This post is an excerpt from the NBS report, "Long-Term Thinking in a Short-Term World," based on research by Dr. David Souder, Dr. Greg Reilly, and Dr. Rebecca Ranucci.