Updated: Sep 25, 2020
Organizations need to overcome short-termism to drive sustainability. This video highlights some specific things companies can do to be more sustainable and stay profitable at the same time.
In recent years many companies have been accused of having a bad case of short-termism. Short-termism means that as a company you are so focused on your short-term results that you may hurt your long-term prospects. In fact, when it comes to sustainability, many companies seem to have a short-term mindset. For example, instead of making a long-term and potentially expensive investments to overhaul their manufacturing operations in order to reduce waste and improve efficiencies, companies may say, “We can’t afford to make those changes right now.” It’s not that they’re not interested in making a long-term investment that will help the both the environment and their long-term profitability. It’s more that they feel they can’t successfully take this type of looking to tomorrow perspective and survive as a company today. But why would they feel this way if the changes will only benefit them in the long run?
Much of the blame for this short-term thinking has been placed on the investment community on Wall Street. CEOs complain that their hands are tied, that their profits will be hurt if they don’t focus on quarterly earnings and the short term, and that sometimes keeping their shareholders happy must come at the expense of keeping the environment healthy. But perhaps the blame for short termism shouldn’t all be placed on Wall Street. Perhaps companies and consumers should own some of it themselves.
For example, research has shown that some companies have short-termism rooted in their culture and would not take a long-term perspective regardless of what the market told them to do. Companies with short-termism rooted in their culture are likely to attract higher levels of investors who are fixated on quarterly earnings. At the same time, some companies choose to take a more long-term perspective. These companies tend to attract investors willing to sacrifice short-term gains for long-term profitability.
Companies like Tesla, Amazon, MX, and Netflix have shown that you can find the right investors and have high market value when you take a long-term approach to business. Elon Musk, founder of Tesla, has waged a battle against short-term thinking in the auto industry by developing electric cars and batteries that can be charged through renewable energy sources. Not only is he selling electric cars but he is also trying to change the way cars are made, sold, and operated throughout the world. Companies such as Tesla have been struggling to make profits in the short term, but they are highly valued by investors, who see long-term benefits coming from these firms in the future.
What this means is that winning the fight against short termism is possible, and you don’t have to be Elon Musk to do it. Managers at all kinds of firms can offset short-term pressures from the investment community and set a different tone.
To fight the tendency toward short-termism in your company, here are a few things you can try.
First, Play by the Stakeholders’ Rules. One of the striking differences between Eastern and Western cultures is the time frame leaders consider when making decisions. Influenced by Confucian ideas that value delayed gratification, Asian leaders tend to look out over a much longer horizon. Their companies will often have a 10-year plan to guide their efforts. For instance, Samsung considers investments with a long-term perspective and explores options that will allow the company to survive for multiple generations. It does this because it considers the interests of stakeholders, like members of the communities in which it operates, and those of its employees, for whom Samsung wants to provide life-long employment.
Taking a lesson from this approach, Unilever, the maker of Tide and Axe Body Spray, has decided to focus more on its stakeholders and less on its shareholders. CEO Paul Polman broke Wall Street norms by canceling all future quarterly meetings with analysts. He said, “Unilever has been around for 100-plus years. We want to be around for several hundred more… If you buy into this long-term value creation model, which is equitable, which is shared, which is sustainable, then come and invest with us… If you don’t buy into this, I respect you as a human being, but don’t put your money in our company.” For Polman, it’s important to also consider stakeholders, such as the environment and the communities in which Unilever is operating, to ensure that those people and their environment will exist in the future. After all, without them the company’s future would not be sustainable.
Second, Get Wall Street to Change the Rules for You. Not all managers are as bold as Polman. In fact, only a few have followed his lead. In our work with companies, we frequently hear CEOs tell employees they need to be more innovative, make long-term investments, and see a longer horizon down the road. Ironically, in the same breath those CEOs often ask their employees why they aren’t hitting quotas or other short-term goals. It’s true that workers today need to do both, but you can see why this message often creates tension within a company.
To overcome this tendency, the Dutch health-care and lighting company Philips talks to analysts about how it is trying to use fewer natural resources and make products less toxic to the environment—even though doing so may raise costs. The company wants to show it’s developing efficiencies that will both lead to profits in the long term and protect the environment. This explanation helps investors understand how Philips continues to try to maximize profits with their money. So even companies that can’t break out and play by different rules like Unilever can still change the existing rules by getting financial markets and analysts to see the value of their long-term approaches to business.
Finally, Get the Board of Directors to Think Long Term. The final technique to help a company take a long-term approach to business is to get the board of directors to catch the vision. As they are currently structured, boards don’t often represent the company’s stakeholders. For example, Merrill Lynch, a company crushed by the 2008 financial crisis, had a board that wasn’t even aware of Merrill’s soaring exposure to subprime mortgage instruments until it was too late. In fact, many scholars argue that it wasn’t a failure of risk management that caused the financial crisis; it was actually a failure of corporate governance. Board members were not asking the right questions of the financial services companies that were providing subprime mortgage instruments. Instead they were looking at the short-term earnings coming in, while ignoring the long-term perspective. To create a long-term focus for itself, a company must change the way its board operates, the way investors and analysts value the company, and the way its managers and CEO do their jobs. This isn’t necessarily easy, but it brings significant benefits to future generations.