In a newly published article on the HBR Blog Network, Ken Favaro, senior partner at consulting firm Strategy& (formerly Booz & Company), blasts pundits who call for executive teams to be more long-term in their mindset as opposed to short-term.
Quoting the late management consultant, educator and author Peter Drucker, Favaro contends that both approaches are faulty. What is really needed is management reform rather than an overhaul of corporate finance and capital markets.
To further argue his point, Favaro cites Drucker, whose writings were instrumental in laying the groundwork for modern American business.
“He recognized that all companies face an inescapable reality: they must invest in their future if they are to have one, but they must also produce earnings today in order to pay for doing so,” writes Favaro. “Moreover, you have to meet your previous promises of returns from investments made in the past in order to have the license to continue investing for the long term. You cannot sacrifice the short term for the long term and expect to have a future any more than the other way around. In other words, ‘long-termism’ is just as bad as ‘short-termism.’”
The real problem with the long-term versus short-term approach, adds Favaro, is that too many companies are managed as if there’s an “inevitable trade-off between producing current results and investing for the future.” When this happens and there’s more of one as opposed to the other, the dynamic is thrown off-kilter. What ensues is a “kind of corporate schizophrenia, where companies switch between visionary, manic investment and aggressive, ‘performance-oriented’ retrenchment.”
Favaro says business leaders instead should focus on management specifics such as: What businesses should we be in and how do we add value to them? Who are our target customers and what is our value proposition to them?
When management can answer these questions, the C-suite will feel less pressured “to rob the future to achieve today’s results or sacrifice the short term in order to build for tomorrow,” Favaro says.
Source: HBR Blog Network Long-Termism Is Just as Bad as Short-Termism