THE CURSE OF SHORT-TERM FOCUS

EPISODE #246 TRANSCRIPT

EVERYTHING PUSHES US TO THE SHORT TERM 

One of the most widespread and seemingly intractable problems facing leaders and organizations everywhere is the drive to focus only on short-term results. This condition doesn't discriminate between industries, countries, or cultures. Almost everything that happens to us in our work lives, locks us inside the prison walls of an ever-present, high-demand, short-term focus.

Very few leaders ever develop the type of long-term perspective that enables genuine attention to where a company will be in 5 years, 10 years, and beyond.

Even though I've trained myself over time to take a longer-term view of the world, I'm the same, instinctively, as everyone else. It's really hard to break free from the pressing issues of today, where the need for immediate action is obvious, and the consequences of tomorrow feel so far away.

In this LinkedIn Newsletter, I want to broaden your perspective with a look at why short-term focus is an inescapable dilemma. I'm then going to get into a few concrete real-life examples of how this plays out, to increase your awareness of the pitfalls. And I'll finish with a few tips for expanding your horizon to the longer-term.

SELF-INTEREST DOMINATES

Strategic focus starts right at the top. The board, the CEO, and the top management team determine what their organization will focus on at any given point. They're the ones who set the time horizon for strategic thinking and investment, and this is the number one driver that determines the mix of short-term and long-term initiatives that the organization deploys its resources towards.

Why, then, is it so enticing to focus only on the short term? For a start, the average tenure for the CEO of a listed company in most countries is around five years. This has to be a red flag.

CEOs are evaluated and remunerated based on the results they achieve. Their sizable base salaries are sometimes completely dwarfed by the upside that their performance incentive schemes deliver. Knowing that their tenure is fragile, many have a mentality of making hay while the sun shines.

To illustrate this point, I'm going to take a look at some of the big earning CEOs. Even though it's a relatively small market, I've got some good data for Australia, so I'm going to use that as an example. This tends to correlate pretty well with other developed markets.

For the really big earners, the bulk of their remuneration comes from performance incentives. In the latest figures, the median total earnings for the CEOs of Australia's 300 largest companies was $2.7 million. 

But let's look at the high end of this.

In 2021, there were only a dozen or so CEOs who had fixed pay over $2.5 million, but when you look at their reported overall reward, the top 10 (who don't necessarily correlate name for name), were paid somewhere between $5 million and $15 million. This gets even trickier (and more lucrative) for those involved when you think about how much they're really making.

Often, long-term incentives are rewarded in the form of share options. Because “long-term”, in most cases, means somewhere in the three- to five-year timeframe, the focus is to get as much lift in the share price--and measures like TSR (Total Shareholder Return)--as quickly as possible.

In most cases, this calls for short-term, highly focused action, rather than long-term, strategic investments. This is why it's useful to look at a measure we call realized pay. Realized pay can be used to track the exercise of share options to see what wealth has actually been created, not just what's been reported in a company’s statutory accounts.

For example, your company might award 100,000 share options to you at the strike price of $1. In the annual reports, this $100,000 would be attributed to your overall earnings… but it also means that you'll be able to purchase shares in the company at some future date, providing certain performance targets are met, for $1 each.

Often, there's a large differential between the strike price ($1) and the actual value of the shares at the time you buy them, and this can be an enormous wealth creator. 

There's a great example of this involving the founders of Australian tech company, Afterpay, which was acquired in 2022 by Square. Way back in 2020, Afterpay's two founders made a huge amount of money when they exercised some of their share options. According to a report in the Australian Financial Review, the two founders, Anthony Eisen and Nick Molnar, exercised one and a half million share options at $1 each. At that time though, the share price was, in fact, almost $90.

This immediately crystallized an increase in their wealth to the tune of an eye-watering $264 million… but their reported pay for the same period was just under $3.4 million. Why wouldn't CEOs and executive teams take a short-term focus?

SHORT-TERMISM HITS CLOSER TO HOME

Obviously, I've used a pretty extreme outlier to demonstrate the principle of how personal wealth creation for CEOs and executives can drive them to take short-term actions, which play into longer-term bonus allocation. But there's a bunch of other good reasons besides self-interest as to why pressure comes for executives to perform in the short-term, at the expense of long-term sustainability.

One is the very nature of strategic planning windows. In most Western countries, strategies would commonly be focused on a five-year window. This is due, as much as anything else, to the amount of complexity, the range of ambiguities, and the market volatility that the current business environment presents.

Asian companies, on the other hand, tend to have more of a long-term focus. It's not unusual at all for Japanese companies to develop 50-year or even 100-year strategies.

The number one objective for a CEO should be to perpetuate the organization. So, how can I ensure that the business is still growing and profitable well into the future? How do I guarantee its long-term health? And how do I make sure I leave it in better shape for the CEO who’s invariably going to follow me?

Another short-term driver comes in the form of market expectations. I remember vividly a conversation that I had with a close colleague of mine a number of years ago. He was CEO of a listed tech company at the time, and he asked me about this very question of developing a long-term focus.

He said to me, "The board consistently makes the point that we need to invest in things beyond the financial results, like ESG, and diversity, and product development. But try missing a single quarterly earnings guidance that you've given to the market and see what happens. No matter what they say, the drive for quarterly financial results overrides everything else."

A dilemma, to be sure.

One final example I want to give you as a driver of short-term focus is the role that planning, and the need to achieve short-term KPIs, actually plays. Plans and work programs are normally constructed with unbridled optimism. As plans are agreed and resourced, and you step into execution mode, all the unknowns, and the couldn't-possibly-happen-to-me risks, begin to emerge.

Then you fall behind, but you still have to hit the KPIs that have been set, which are (most often) annual targets. This presents a response window of maybe three to six months, in many cases. Any long-term perspective that you might have once had, goes out the window. All of a sudden, you find yourself making concessions and compromises to stay on track.

Often, these compromises come in the form of reductions in scope and performance. You know the story, "Ah, we'll do that later. Let's just focus on getting a minimum viable product to market." And, with that disappears all the features that were designed to deliver the long-term benefits.

Of course, there are exceptions to all of this. Some industries require constant innovation from companies if they're to remain competitive: disruptive technology industries… artificial intelligence… medical technology… biotech… for these companies, their business models revolve around large R&D budgets, and long tail investments that require long-term strategic positioning.

Not all of you are running businesses, or even in a position to influence what happens at the top, but you can always look through the lens of long-term focus, and point out the downside of short-term expediency to the people above you. Let's face it, one day it's probably going to be your problem to consider.

THE REALITIES OF SHORT-TERMISM

Let’s look at a couple of real-life examples of the ways in which short-term focus plays out, in the hope that you'll be able to recognize it better when you see it, and potentially act to circumvent it.

Short-termism often comes in the form of some type of cost-cutting, and this is one of the easiest ways to lift EBIT performance, because it's controllable. Deceptively, long-term consequences often aren't felt until much, much later. So, it feels like it's a free kick.

These types of measures often come in the form of layoffs and redundancies, and there are plenty of other tightening-the-belt measures that have less visibility, but are nonetheless destructive to long-term value.

Controllable (or discretionary) costs are reduced to a minimum. This normally hits what are regarded as non-essential areas. Corporate functions, like risk and compliance--I’m sure banking industry executives wish they'd paid more attention to that--but they also hit some company-wide budget categories that are absolutely essential, although they can be considered discretionary… like training and development.

Some industries even have flexible workforces underpinned by a high percentage of contract workers, so they can flex their staffing levels up and down easily. That is to say, sack people quickly when the going gets tough, and re-employ them (at a premium) when times improve. You don't notice the penny-pinching straightaway. But that would be the next guy's problem, right!?

Another manifestation of short-term focus is the drive for symptomatic fixes versus root cause solutions. It's really easy to keep kicking the can down the road and getting into a break-then-fix mentality. When something goes wrong, we'll respond quickly to solve it, and then get back to business as usual as quickly as we can. There's little long-term planning, and the time and effort required to ensure that it doesn't become a recurrent problem by resolving the issue at its core never seems to happen.

One example of this from my past was a mine site that had a single source of electrical power to one of its underground pits. The cable that supplied the power to this mine had been repaired on numerous occasions. Each time it failed, the electrical tradesmen would find another way to splice the cable, to make it work again.

After numerous break/fix cycles over a period of years, eventually their luck came to an end. The power source wasn't repairable, and the cable had to be replaced before operations could commence again. The $1 million or so that was saved by not implementing the root cause solution ended up costing the mine tens of millions of dollars in lost production.

COST? OR VALUE?

Better-run businesses use what they call, reliability-centered maintenance. Recognizing the fact that problems are a lot costlier to resolve if they come as a result of an operating failure, this seeks to reduce the likelihood of such a failure. 

On a risk-assessed basis, preventative maintenance is carried out to keep the assets running, which improves their reliability and availability. It's a different mentality to accepting break/fix as a way of life, and it delivers much better long-term results.

Another sign of short-term focus can be seen in the way procurement processes work. Is procurement in your business purely a cost-driven activity? Or is it a value-driven activity?

Procuring the lowest cost item isn't always the smartest thing to do, despite that psychological drive and organizational pressure to do so. Sometimes you can get better value by spending more now in order to get a product with a longer useful life.

For example, you can buy a cheap set of tyres for your car that lasts 20,000 miles… or you can pay more and get a set of tyres that lasts 50,000 miles. As long as the cost isn't two-and-a-half times greater (which, of course, it never is), it's better value to go for the more durable (and expensive) tyres.

We also need to consider that, sometimes a long-term focus is critical in not making major mistakes. In some industries, you've got the opportunity to invest in assets with long lifespans. Think of mines, power stations, gas pipelines, cruise ships, and commercial real estate. The cost to build these assets can be enormous, and the returns come through the consistent generation of revenue, each year, over the operating  life of the asset.

Bear in mind our previous discussion about optimism bias. A short-term focus might make it look attractive to build an asset like this. It's fun and exciting. The scale and scope of projects like this are challenging. And the asset is a physical, tangible outcome from the fruits of your labor, which brings with it a certain satisfaction. This is why these decisions require long-term discipline.

From the very start of my tenure at CS Energy, almost 10 years ago, I thought it was a really bad idea to contemplate building another coal-fired power station. And we had an opportunity to do so, by expanding our premier asset, the jewel in the crown of CS Energy's portfolio, to double its capacity. It was a real option that was on the table.

That proposed investment would've been well over $2 billion, but it would've seen a highly efficient, low-cost power generating unit built next to the existing one. Even then, though, I had little confidence that the market would provide the necessary returns over the operating life of the asset, which was well in excess of 30 years. It would've been awesome to do the project in the short-term, for all sorts of reasons. But the long-term uncertainty made the project prohibitive.

I even went so far as to go on the public record, on national television in Australia, in early 2017 with my prediction that there would never be another coal-fired power station built in Australia. It's easy to look back now (after three changes of government) and think that was obvious. But at the time, it wasn't as straightforward a prediction as it might now appear.

EXTENDING YOUR FOCUS TO A FARTHER HORIZON 

Let's finish with a few tips for extending short-term focus in your business. My first assumption is that, for the most part, short-term thinking will always prevail. As I covered earlier in this newsletter, there are too many compelling reasons why rational, sensible, smart humans think only in the short-term.

If you can adopt a slightly different mindset, you can make some progress towards longer-term goals. And the higher up you go, the more useful this becomes.

First, think in terms of the time horizon of your role. This isn't just for CEOs. Even as a middle manager, you get to make calls all the time. Whenever you're looking at a problem that requires a short-term fix, just ask yourself one question: "Is there any way I can get a three-year solution, instead of a three-month solution?"

Asking this question will do two things. The first is that it will sensitize you to the ever-increasing emphasis on short-term results, giving you a better perspective. The second is that it's going to potentially extend the range of possible options that you have to work with. Sometimes though, the hardest part is selling the benefits up the line.

Second, if you have to put in a quick fix to get an asset back up and running, never do it without circling back to the root cause. If a critical machine on a production line breaks down then, sure, you've got to fix it, and it may require some sort of immediate action and intervention. Once that's done and the smoke is cleared, though, make sure you allocate time and resources to working out what the root cause is, and planning how to resolve it. Otherwise, your life's just going to be a series of emergencies. We all like to play firefighter sometimes, but that's best left to the professionals!

My third and final tip: if you're at the top of an organization and you have the ability to influence in the longer-term, you've got to understand where long-term value comes from. So, keep strategy front-of-mind, all the time. Rather than just treating it as an annual process, where you dust off last year's strategic plan and refresh it to take into account last year's activity, take a zero-base approach. 

Use fresh eyes to view fresh opportunities and risks, and always ask, "Where will this organization be in 10 years?"

Just remember, competitive advantages are fleeting. According to research from David Yoffie at Harvard Business School, high performing companies revert to the mean within seven years. In other words, no advantage lasts forever. Today's rooster is tomorrow's feather duster.

HOW WILL YOU BE REMEMBERED IN THE LONG TERM? 

When it comes to thinking about the long-term, sometimes it's genuinely just too hard, and it's always easy to grasp the short-term solutions that deliver a payback now, rather than living with the uncertainty of a longer range option that may or may not pay off.

I always ask myself one question: When the ink dries on history, many years from now, how will I be remembered? Do I want people looking back and saying, “Wow, there was very little vision there. Look how things have gone downhill in the last 10 years." Or do I want people looking back and saying, "Those were the golden years: there was a leader who drove long-term value?" 

Funnily enough, to me, that makes a difference.

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