Most major challenges that businesses face today require time to address. It takes time to create a shift of mindset, or to be open to new ways of doing things, or to build new capabilities. But today we in business try to break everything down into quick strategy bytes and focus on delivering consistent, predictable results.
(CEO, Global Fortune 500 Firm)
There is often discussion today about the financial engineering being undertaken by banks in creating ever more complex financial products. But there is another area with a long, growing history of financial engineering of a different sort—and that is occurring inside of firms as leaders try to manage results. In the extreme, internal financial engineering is reflected in a growing list of corporate scandals, but it also occurs at other levels, potentially with even more damaging impact on an even greater array of businesses. In many organizations, the focus of this financial engineering is on managing financial results, especially short-term financial results, to ensure predictable and consistent growth, an apparent hallmark today of high performance. The question is, however, does this internal financial engineering limit the capacity of a firm to prepare for long-term success. In one word, the answer to this question is an emphatic YES!
Businesses today face a vast array of dramatic challenges in the environment they face today and will continue to face in the future. The Global Trends Report 2010 describes a number of these challenges. Let’s just consider a few. We are living in a world of falling boundaries that is dramatically reshaping the environment in which firms operate. Falling boundaries between geographic markets is well known. Boundaries are also falling between traditional industries. As an example, think about the growing interdependence of the music and mobile phone industries. (If you wanted to invest in a company benefiting from the future profit potential of music, would you invest in a record label, or Apple, one of the many social network sites?) Then add in falling boundaries around firms, with the growing importance of tapping into expertise and resources not owned by the firm itself. Finally, add in falling boundaries between generations, with executive teams within organizations today often including members of the “Baby Boomer” generation, Generation X and also Generation Y, each with different mindsets, styles and views of the world. In a dramatically changing world, are the hallmarks of success truly consistent and predictable short-term financial growth?
Given this rapidly changing and uncertain environment, one question we often ask leaders is about the metrics that they use to measure their own success:
“Do you measure your own success in terms of the results you achieve today or the strength of the institution you leave behind?”
The typical answer to this question is “of course both,” often with a look on their face of how dare you ask such an obvious question! But then with even a little probing the issue becomes more difficult. How do leaders measure their results they deliver today? Here the answer is easy–consistent and predictable financial results. How do they measure the strength of the institution they leave behind? Here the metrics are not so clear and many leaders struggle even to articulate them. But does fuzziness of the answer and metrics really justify not putting equal or even more weight on this area? Clearly, the reason executives are in their top positions is because of their ability to lead the firm for the future, not just manage it today, right? Not according to the strong emphasis on internal financial engineering, albeit with an external goal – to make the analysts happy.
Is there an alternative to the current situation? What about transparency, alignment, and co-creation between firm leadership and their organization’s true long-term owners (not the analysts or short-term traders)? What if firm leaders took more responsibility for reaching out to, communicating with, and maybe even shaping the perspectives of their long-term owners? What if business leaders and their long-term owners could more directly communicate and identify a “pathway to the future?” Maybe this is naïve, but is it any less naïve than believing that taking care of short-term financial results will ensure long-term success?
So let’s just imagine for a moment what it would require to achieve this linkage and alignment between firm leaders and long-term owners. First there would clearly need to be a counter-balance to the power of analysts, who currently serve as judges and juries of firm performance in their role as market representative. Second there would be a need to re-evaluate and reconsider the roles of Boards of Directors. Rather than being friends or representatives of firm leadership, or governance bodies that leaders need to interact with for necessary approvals, or still again governance bodies making up for the lack of ethics/values of firms or the failure of regulatory bodies to play their roles, they would need to be true representatives of the long-term owners. Finally, there would need to be a stronger focus and accountability of firm leadership for reaching out to and building bridges with their organization’s long-term owners. Each of these changes may be difficult to accomplish, but are they really impossible?
Leaders today face probably one of the greatest periods of opportunity or challenge. A changing environment opens up opportunities, it can create a period of excitement and engagement for all the employees of a firm, it can be a period of leveraging the past successes of a firm to ensure its future. Or it can be a period of internal financial engineering. Leaders today have to choose!!
The questions we raise in this series of blog posts are: What is the impact of short-term thinking in a changing world? Who benefits from short-termism? Is the current situation acceptable for business leaders today and, if not, what can be done about it? Here we want to hear from you – both your experiences and ideas.