Long or Short Termism?
Flying to Dar this week, I overheard two Kenyan executives discussing the challenges they were facing. It was a familiar story – the last trading year (however strong) lay firmly in the past. The pressure was on to win in 2020; to make the commitment promised late in 2019. The fixation on the coming 12-month period was such that one of the two, who was preparing to on-board a new team member in April had told his candidate ‘don’t worry about 2020, it’s not your year. You’ll be judged on 2021.’
But we all know that businesses, and company cultures, don’t work in 12 month cycles. That’s simply an artificial creation designed to help us account for our progress. Instead companies represent a continuum in which development, adjustment, success and failure happen in their own sweet time. So, with leadership teams increasingly tasked with meeting both long-term and short-term stakeholder demands, how best to keep a balance?
Recent news from the UK Institute of Directors (IOD) reveals that Chief Executives are increasingly finding themselves having to meet conflicting demands from different breeds of shareholders. Some investors seek short-term opportunities in favourable sectors where they will hold their ownership for less than a year before cashing out. Others look to the Chief Executive to implement a long-term strategy that ensures corporate viability for the longer term, increasing the company’s value at the expense of regular dividends.
“The key is to communicate to the market the time horizon of your business case and try to attract the kind of investors that share your vision,” says Stephen Martin, Director General of the IOD.
As investment in Africa grows in scale and variety, we’re also facing these challenges here. Businesses need to negotiate priorities, which can lead to heated discussions in the boardroom, as the CEOs strategy view can be at odds with Directors’ governance objectives or revenue priorities.
Recent years have seen institutional investors (pension funds; asset managers) campaign for CEOs to move away from shorter-term targets in favour of longer-term sustainability. As far back as 2017, the Investor Association, which represents mainstream fund managers, warned in its Long-Term Reporting Guidance: “Reporting that is concentrated on short-term performance … can inadvertently embed an inappropriate short-term focus in management decision-making.”
IOD reports that 65% of CEO’s say short term pressure has increased over the past 5 years. 55% of those without a strong long-term culture say their company would delay strategic initiatives in order to hit quarterly targets
One solution is to focus on long-term brand goals, but pick short-term wins along the way that keep levels of employee energy and shareholder enthusiasm high.