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Short termism

Today’s capitalism is much different from what it was half a century ago. Then, valuation of a company was more based on tangible assets corrected with potential, while today financial analysts take a look at potential value, hardly influenced by information on tangible assets. That is why companies like Twitter get such a high valuation, without being profitable. The stock price of today takes into account the potential of tomorrow, even when that potential is highly speculative and not based on evidence or assets. This is how financial crisis is inherent in the system. The Tulip crusis, the dot com crisis and the 2008 crisis are all examples of the financial system getting overheated because of overvaluation. This is wat Sloterdijk has called futurism: our entire lives, our economy is based on growth and the future value of today’s decisions.
Another thing that has changed, is the short-term thinking. While investors used to have a long term perspective upto 6 years, today the perspective is a quarter. This is called short termismAnd you might assume that this perspective, which has led to many weird decisions – would have been abandoned after the 2008 crisis. But this is not the case.

The holy grail of Long Termism

McKinsey and the Canada Pension Plan Investment Board (CPPIB) conducted a survey involving more than 1,000 board members and C-suite executives around the world. The purpose of the survey was to assess the progress in taking a longer-term approach to running a companies. For the full article published in Harvard Business Review, follow this link.
The results are stunning.

  • 63% of respondents said the pressure to generate strong short-term results had increased over the previous five years.
  • 79% felt especially pressured to demonstrate strong financial performance over a period of just two years or less.
  • 44% said they use a time horizon of less than three years in setting strategy.
  • 73% said they should use a time horizon of more than three years.
  • 86% declared that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation.

The authors propose 4 lines of action:

  1. Invest the portfolio after defining long-term objectives and risk appetite.
  2. Unlock value through engagement and active ownership
  3. Demand long-term metrics from companies to change the investor-management conversation.
  4. Structure institutional governance to support a long-term approach

To me Long termism is like the holy grail. We all want it but we seem not to find it. If business leaders are convinced that long termism is the way forward, why is it then so hard to move in that direction. Especially when we know that the economy and the entire world would benefit from it? Why is it so difficult to focus on sustainability of business decisions? These are of course naive questions. And the answer is simple: greed and growth. The quarterly reports are rituals of an economy that has bedazzled itself by greed. And growth has become the ultimate target. And unfortunately inflation makes it necessary to have growth in order to maintain profitability (oh yes, we need profitability).

Short Termism and Talent

This blog is not about the above 4 strategies, nor does it provide solutions on how to move to long termism. This blog is about the impact of short termism on what companies like to call their single most important asset: its people. Asset managers should take into consideration a company’s capacity to attract, develop and retain a workforce. For that you need leadership, an attractive context, investments in people and of course a clear people strategy. Asset managers should refrain from trying to valuate these corporate characteristics into money value. Attempts to do this in the past were not satisfactory. The so-called human accounting failed because of the lack of clear criteria to valuate human characteristics and more importantly because of the fact that human assets are not owned by the company. You could view the human side of enterprise as some sort of goodwill, without property rights (you can own a strong brand, you do not own talent). On a more philosophical note you could say it’s also not human(e) to try to valuate human factors of companies. That is why I do not talk about human assets, human resources or human capital, but just about people.
There is at least one issue asset managers and business leaders should take into account: short termism has possible detrimental effects on the people strategy. There are several reasons for that.

  1. People are flexible and versatile, but not as versatile as many non-human factors
    The makable person is partly an illusion. People can only become more of themselves and as a company you ought to work with the talents at hand. Now this might be a reason to prefer short term reorganisations every time the company changes its strategy. The question is how often one can do that. Companies that restructure often will see their employer brand damaged. It is even to be expected that the memory of the labour market will increase due to social media supported exchanges berween current, former and future employees.
    People are simply not interested in short term thinking. They crave for stability, certainty anh predictability. In the current economic turmoil these are things that are difficult to offer. But in the turmoil, a stable strategy can do wonders for economic performance as the article in Harvard Business Review shows. It can do wonders for a people strategy as well.
  2. Culture
    Culture is one of the most determining yet less tangible aspects of corporate life. But culture is not easily changed. So short term decisions can fail because of their incompatibility with culture. Short term decisions that require culture change are bound to fail. Of course you could engineer the corporate culture on short term decisions. But this is not advisable. Culture is about identity and values. Those are parts of the corporate equation you do not change lightly and easily. Let’s not forget that culture is key in attracting and retaining people. Most people are looking for a company they can identify with.
  3. Great things take time
    Rome wasn’t build in a day. Companies usually start small. A decision is often 1 % of the work. You can dream to realise objectives in a quarter, but you need more time than that to realise great things. Let’s not fool ourselves. Compare it to architecture. Before you can build, you need to plan ahead. And when you start the construction, you’d better know how it will look like. Having to change the plan during the construction phase is possible, but costly. And then, you need to take the necessary time. Fast implementation can lead to sloppiness, unstable constructions, repair costs, … Not every construction has to be a Sagrada Familia, but if you want to leave mediocrity and create great things, you need to give it time. A quarter in corporate life, is like a second in a day. And this is especially the case where people are involved. Time and again I have seen how the time fetish has led to senseless decisions. Time is only of the essence when it comes to competetive situations. But focussing on the long term, does not exclude agility. Agility can even be a long term strategy. And even becoming agile will take time and perseverance.

What Long termism can do for People management

Imagine what a long term investment approach would mean for the daily operational management, especially people management. A long term approach makes these things possible:

  1. Building a (performance) culture
    Now this should be something any asset manager should be interested in. Having a long term perspective enables companies to build culture, also a strong performance culture. But we should bear in mind that a performance culture is not only about people working hard. A performance culture is a system that is carefully built and that integrates leadership, strategy, performance management and talent management. To build a high performance culture you need to create processes but also rituals and habits. You need values that take time to come down from the walls and settle into the hearts, heads and hands of the employees. Above all, you need to create meaningfulness. People can work hard as long as what they do is meaningful.
    So as a company you need to invest in conversations with the employees on all levels, in order to explain the strategy. And if a company restricts its strategy to financial parameters, people will not be interested. Finance does not thrill most of the employees. And if you change strategy too often, leadership will lose its credibility. People on the shop floor are very critical about strategy changes. So make sure that there is a stable strategy, as part of a performance culture. And if you change that strategy, you’d better make sure you have a good reason to do it.
  2. Retaining people
    In the war for talent, the gravity of a company is crucial. Short termism reduces that gravity, while long termism increases it. By retaining key performers a company can create a stable operational quality
  3. Hiring on potential and attitude, rather than on experience and competencies
    Short term pressure makes it difficult to hire people who are not ready yet, but have the potential for future contribution. As pressure on short results puts line managers under pressure, they are less likely to easily recruit young people, management trainees or people with atypical profiles. There is just not enough time to invest in education, training. Short term pressure leads to cloning and a lack of diversity.
    A company can benefit from diversity. Diversity leads to creativity, better decisions, more input. Companies can translate this into money value. Of course you need to start hiring for diversity, hiring on potential and attitude. And when you start, you cannot expect immediate return.
  4. Capability Building
    An essential element in strategy is capability building. A capability creates a competitive advantage. Capabilities could be operational excellence, customer intimacy, product leadership, time to market, talent building, leadership, … All of these capabilities are based on human charachteristics: knowledge, creativity, engagement, customer orientation, … Creating a capability requires all people to contribute according to the desired capability. Building a capability requires time. Short termism destroys capability. Long termism helps to build it.
  5. Allowing for errors
    In a short term approach errors are problematic. Errors reduce results, put more pressure on people. Because errors usually have a negative impact on committed results companies might look for scapegoats. This narrows behaviour to safe behaviours, to umbrella tactics and reluctance to take initiative. The risk appetite of companies need to be determined and needs to be translated into both corporate culture and investment culture. Errors can be sources of learning and therefore a leverage for future success.
    Short termism leads often to a focus on operational excellence and not enough on explorative activities. Exploration indeed can interfere with exploitation, unless you plan for it. And if you plan for it, you need to expect that explorative processes need time.
  6. Chosing the proper way and the proper moment to act
    Short termism urges companies to take short term decisions on employment matters. These decisions might be necessary, but inspiration sometimes comes from a short term target. Sometimes companies may lay off people in one year, just to find that they need to recruit similar profiles in the next year. Asset managers might urge companies to do so based on short term targets and short term benchmarks.
    In the aftermath of the financial crisis in 2008, many companies were facing a massive decrease of sales. Customers emptied inventories and did not order, because they were facing similar problems. It was a vicious circle and some economists feared a total breakdown of the economic system. Indeed, sales slowed down in many sectors, leading to a general slowdown of the economy. This has led to many bankrupcies and lay-offs. Still, some companies tried to avoid this. For a clear reason. The employees involved had competencies that were difficult to replace. Those companies realised that they had invested a great deal in their skills. So they held on to their employees. They made use of techniques in the labour market such as flex time, temporary unemployment, voluntary reduction of working time, … These companies have recovered faster from the crisis than companies that took short term action. Long termism was beneficiary.


The authors of the McKinsey Study conclude:

We are convinced that the best place to start moving this debate from ideas to action is with the people who provide the essential fuel for capitalism—the world’s major asset owners. Until these organizations radically change their approach, the other key players—asset managers, corporate boards, and company executives—will likely remain trapped in value-destroying short-termism. But by accepting the opportunity and responsibility to be leaders who act in the best interests of individual savers, large asset owners can be a powerful force for instituting the kind of balanced, long-term capitalism that ultimately benefits everyone.

Short termism destroys value, also in terms of people. A true people strategy needs to be long term. It creates culture, capabilities, engagement, … The model of the future needs to be based on long termism. Also in people management.

David Ducheyne is the founder of Otolith. As a former HR and business leader he focuses now on humanising strategy execution.

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