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Mike Useem: Thank you.
Rodney Zemmel: Thank you. Happy to be here.
London: We’re here to talk about managing for the long term. But let’s start with short-termism. To be the devil’s advocate, Rodney, is it really a problem?
Zemmel: It’s certainly not a new problem. You can find newspaper articles from the 1920s, and even earlier, talking about the perils of short-termism, the rise of short-termism, and so on. That said, we do think there’s good evidence that we’re experiencing more of a short-termism epidemic than we have for a long time.
Eighty-seven percent of executives and directors in our surveys feel the most performance pressure over a two-year time horizon rather than a longer time horizon. And 99 percent—and in some more recent analyses, 100 percent—of earnings for the S&P 500 are spent on dividends, on buybacks. Certainly more companies, more directors, and more investors are feeling the pressure for short-termism than they have in the recent past.
Simon London: And dividends and buybacks matter because?
Zemmel: It’s a sign of companies not having the confidence to invest in the long term and instead handing the cash right back to their shareholders now. There’s nothing wrong with giving cash to shareholders. That’s what you’re supposed to do if you’re a company. But the idea that you would give all your current cash back to shareholders rather than investing in the long term obviously creates some doubts.
London: To what extent is this about public markets? David Rubenstein points out in the introduction to the book that the number of US–listed companies has halved, I think he says, over the last 20 years. There are certainly more companies appear to be retreating from public markets. Is this a public-market phenomenon?
Zemmel: It’s a really complicated issue. I end up feeling that it’s a bit like one of those Agatha Christie novels where everyone’s pointing the finger at everybody else as the culprit. Executives and many boards will tell you it’s the public markets, it’s the sell-side analysts, who are looking for news and who are asking questions about this quarter’s profits. It’s short-term traders, it’s day traders, or, even worse, it’s activist investors. And it’s the markets that are putting on the pressure that gets hard for companies to stand up to.
What the investors will say is, “We actually would value companies that are able to better articulate their long-term strategy, and better articulate their long-term capital allocation.” If you look at investor behavior, it’s hard to say that, for most investors, they really are looking to favor the short term over the long term. The reality is if you use a discounted-cash-flow method, 70 to 90 percent of the value of most companies is beyond a three-year time horizon. Most investors realize that. The other reality is that if you look at who owns stocks in the US, 75 percent is still owned by what we would classify as long-term investors (exhibit). That’s either index funds, retail investors who aren’t day traders, or value funds. While I’m sure the investing community has a role to play in this, and the [decline in the] number of companies in public markets is really compelling, it seems that there’s a bit more to it than just blaming the markets.
Useem: Rodney’s reference to the fact that three-quarters of equity assets are there for the long run—either in an index fund or just the orphans and the widows, as they’re sometimes called, the individual stockholder—this says that the issues and how to grapple with them, in our view, come down to what happens in the boardroom and the executive suite.
London: There’s this wonderful Jack Welch quote in the book which boils down to “Anybody can run a company for the short term, and anybody can run a company for the long term, but the hard part about management is getting the balance right.”
Zemmel: That is why we wrote the book, Go Long. We found a lot of research, some from McKinsey, some from elsewhere, on the value of being a long-term investor and why it’s better for companies to focus on the long term. But the actual practical guide to how management teams and CEOs should do it, doesn’t exist. I don’t know that we’ve written it, but the book certainly explores CEOs who’ve made those decisions, how they did it, and hopefully has some useful lessons for people thinking about that trade-off.
London: One of the things that jumps out at me in the case studies in the book is that the CEOs had to buy themselves the strategic flexibility to invest for the long term by sometimes doing some quite painful things in the short term. For example, Ford [in 2006] was a turnaround situation. [Ford CEO] Alan Mulally had to cut a lot of costs and lay off employees. But he did it with growth in mind. It wasn’t an asset-stripping exercise or just running the company for cash. There was a long-term objective behind it.
Mike Useem: To pick up on that, our method of thinking about how to transcend this seeming problem—of a lot of pressures for short term but companies want to build for the long term—is to go to people who have managed to get the short and the long. There aren’t a whole lot, but there are enough to compose a primer.
Alan Mulally was recruited by William Ford, executive chair of the Ford board, a couple years before the financial crisis of ’08, ’09. Even though it was the lull before the storm, he quickly realized that Ford was going to post a $17 billion loss the following year. Remember, this is even before the financial crisis took everybody down. So, he set forward a strategy to solve the immediate challenge: How are we going to pay the bills with a $17 billion loss? Ford secured a credit line for $23 billion and pushed its engineers to bring out better cars that would sell better. In the short term, the company did take some significant losses, but all wrapped around a strategy for recovering and getting through whatever might lie ahead.
Zemmel: What I think is interesting when you compare and contrast the different stories that we covered in the book is there were some dramatic turnaround stories. The Ford story may be the most dramatic. But there is a very nice quote from Sir George Buckley [former CEO] at 3M, who said, “The core of every business is dying.”
He turned around 3M by refocusing and sustaining investments in R&D. What I thought was very interesting was his point of view that it’s not just about managing through a crisis. Every business has a dying core because that’s the old heart of the business. The only way you’re ever going to be able to grow the business is by making sure you have the balance right between how you manage the decline or the stability of the core and what you do in new areas.
Useem: George Buckley, who was thinking four, five, six years out, said, “We’ve got to structurally, through policies and practices, get our engineers and scientists focused on bringing out new products.” You can beat the table to make it happen—and he did, of course. But he also had to find cash to make it happen. He made some very tough decisions. He sold off a big pharmaceutical arm, took costs out of other operations. It was very painful in the short run, but vital for the long term
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