FT ringing the Closing Bell at the NYSE (Photo credit: Financial Times photos)
It appears that one potentially good thing to emerge from the global economic meltdown is a return to sensible business planning and cycles.
One of the scourges of many businesses – this started in the US and spread out from there – is ‘Quarteritis.’ Not strictly speaking a disease, but something that has probably resulted in a lot more suffering than most diseases, ‘Quarteritis’ is about an overarching focus on ensuring each quarter’s financial results are significantly better than those of the quarters that went before.
While we all want to be part of, and invest in, businesses that have good growth, the fact is that business, like most things in life, moves in cycles and the best long-term businesses are those that plan for the long-term, not just the next quarter. A short-term focus leads to rash decisions, decisions that might be good to “save this quarter” but disastrous in the medium term.
To illustrate: in the IT industry two popular results of this are distributors being forced to take huge amounts of excess inventory in a quarter (“channel stuffing”), or new distributors/resellers appointed suddenly to get a new stock order into the current cycle.
Both of these have similar results over succeeding quarters – reduced profitability for all concerned, stretched payment terms, credit limit issues meaning needed products cannot be ordered and, potentially, delays in releasing new products while excess inventory is moved out of the channel.
By taking the longer-term approach to ensuring that all parties in the channel can grow profitably, vendors may not grow as quickly in the short-term but will ensure happier customers – at all levels in the supply chain – and so more loyalty and a more sustainable growth well into the future.
Wasn’t it this short-term focus – albeit in the financial markets this time – that ultimately caused the current crash? Executives and others were induced by means of massive bonuses to find ways to grow well above the market average and so started giving mortgages to those that could never afford them, and repackaging these as “high quality” loans. Frankly, this would have been considered fraudulent in many places – it’s certainly ethically very bad anywhere – and it was only a matter of time before implosion happened.
However, those involved had already taken their money and run… Isn’t it this short-term bonus-driven culture that’s behind the trend to shorter and shorter tenure by CEOs of public companies? Can CEOs really be effective when they’re only in place for a few years?
It’s time we started looking at the longer term sustainability of business, and rewarding people in ways that encourage this and I, for one, am pleased to see a number of governments leaning in this direction. Authorities and shareholders should claw back bonuses paid for fraudulent practice, especially when taxpayers have to bail out the companies as a result. CEOs, and other officers, should be rewarded, and lauded, for long tenure and sustained growth.
Business needs to get back to a solid footing and good practice – we should support those that are trying to move in this direction.
Amazon (Photo credit: topgold)
This blog piece was first published in Sep 2009, so it’s good to see that there’s growing acceptance of the need to look longer-term as this video from INSEAD clearly points out – Prof. Javier Gimeno talking about how “short-termism” undermines a company’s long-term competitiveness.
Related articles
- Short-Termism at Its Worst (blogs.law.harvard.edu)
- In defence of short-termism (stumblingandmumbling.typepad.com)
- Rethinking governance: what should companies be responsible for? (newstatesman.com)
- Sir Richard Branson Launches The B Team to Revolutionize Business Goals (sustainablebusiness.com)
- CEOs no longer have the luxury to focus on the next 100 years (rwdrwd.wordpress.com)
Hear hear Guy.
A good & timely analysis. The question is will anyone listen for more than a short time.
What do you think can be done to counter the trend of short termism? Legislation?
If so who by?
Thanks, Peter – although I’m not a fan of legislation in general, I think it’s pretty clear that individual greed supersedes common sense and community values, so there is little option but to legislate. The G20 would be a good place to start: agreeing common mechanisms for implementation from a given date should stop a simple transfer of financial centres from one country/location to another.
Reducing financial reporting for public companies from quarterly to every six months would probably also help. With this latter move there is a potentially greater risk to investors, but I believe this would be more than offset by the positive effects of growing business for the longer term. It would also save businesses a fair bit of time/money – and, to be honest, I don’t believe the six-monthly reporting we had in South Africa led to greater problems for investors than would have been the case with quarterly reporting.
Agree with you. But it will be difficult to get the US to focus long term, despite what G20 agreed on. Anything for the almighty dollar…
Thanks Catarina – getting the US to introduce sweeping changes will, as you say, be difficult.
What I’m hoping, though, is that things like the move to introduce a more sensible approach to bonuses for bankers et al – read: longer term focus – will rub off more generally.
It may be that this would catch on first in Europe, we’ll just have to see, but my perception is the groundswell of opinion is growing globally.