QUARTERLY CAPITALISM AND THE FUTURE

Anxiety, anticipation, suspense. These aren’t only descriptive words for a good thriller novel or movie. They also relate to quarterly market updates for quoted companies – a major event in the business world creating intense frenzy and palpable excitement for companies, investment analysts, market watchers, investors and regulators alike.

It’s open season for investment analysts, newspaper business desks and business talk shows on radio and television. The market is literally salivating for all the salacious details: which companies are meeting or exceeding analysts’ forecasts; which strategies are working or failing; which CEOs are ‘chest-thumping’ or making excuses; what promising or placatory statements have been issued for the year ahead. You hear artful business language,phrases like economic or regulatory headwinds,positive growth trajectory, cautious optimism, muted growth, etc. The market also waits for casualties: CEOs fired, resigning, stepping aside, retiring or proceeding immediately on “gardening leave” on account of under performance or ‘uninspiring’ performance. It is all so intense and sometimes mirrors a gripping drama by a Hollywood screenwriter!Then soon after the sigh of relief from surviving the market onslaught with a decent share price for that quarter, comes renewed pressure for the next three months.

This has now generally become the reality of managing businesses in the modern world.

Even for companies not quoted on the stock exchange, the private owners challenge their management teams in like manner. After all, businesses are expected to grow, grow and keep growing regardless of external factors. This reality is what Patrick Gillespie of CNN Money has referred to as “Quarterly Capitalism”.

We are indeed in the NOW age where immediacy is the order of the day. CEO/C-Suite compensation is mostly predicated on these short-term metrics which drive leadership behaviour and how companies are run – with greater focus on the now, and not enough deliberate thinking or focus on the future.

The biggest challenge of running such modern day businesses today is balancing the short term expectations of delivering consistently good returns to shareholders in the atmosphere described above, with taking the right decisions consistent with the long term interests of the company. The obvious answer could be that companies should consistently engage the market or their private shareholders on their long-term growth plans and demonstrate short-term results within the long term plan. Right? So there should be no problem then.

However, it is not that simple.

The problem is, what happens when there is an obvious conflict between delivering short term results and realising long term objectives? For example, in a consumer industry, decisions may be taken to reduce channel commissions to meet quarterly numbers but these may weaken channel strength, wallet share and preference in the medium to long term. Pricing decisions in response to immediate competitive pressure may also weaken company and industry profitability in the medium to long term. Investments in innovation critical for sustained differentiation may be sacrificed on account of immediate cost savings to improve margins.

These may look like obvious trade-offs but are actually very difficult, near impossible decisions for some CEOs to reverse in the light of a short-term operational mindset ingrained in the company. So everyone gallops along day by day, week by week, month by month while this mode of operation tugs at the heartstrings of discerning leaders, reminding them that they may be sacrificing the future of the company on the altar of the present. Or worse still, that they may be abdicating their responsibility for thinking of the future of the company, to blind optimism or hope or even leaving this crucial task to the new leaders who will succeed them.

Some companies have been bucking the trend. On the day of his resumption as Unilever’s global CEO in January 2009, Paul Polman, cancelled quarterly forecasts and boldly declared that the company had decided to swap the push for short-term results (he called this “short-term rat races”) for a long range business plan tied to environmental and social sustainability. He also boldly declared that the company works not for shareholders but for consumers and that this is how shareholders are rewarded – in a sustainable way. Not everyone is as bold or daring as Polman. Then again, not everyone needs to run a company as big as Unilever to think this way. What’s important is having a focused approach to making the company sustainably different in the medium to long term beyond only managing day-to-day operations. What’s important is realigning the operations of the company to support the positioning of the business for the desired future.

On a related note, some interesting developments in the telecoms world over the last few weeks are worth noting. We have seen globally established carriers acquire other businesses to mitigate the reality of their maturing and in some cases declining, core telecom businesses. Verizon recently acquired Yahoo’s web assets for $4.83b which with an earlier acquisition in AOL will create a global advertisement and media enterprise. Not done, some days ago Verizon also acquired Ireland-based vehicle tracking firm Fleetmatics for $2.4B. Softbank recently agreed to buy ARM (the UK chip designer) for $32B to position itself to lead the Internet of things’ (IoT) revolutionary growth. These companies are not only thinking but acting consciously to broaden their revenue streams while differentiating their core businesses to mitigate revenue declines in these same core businesses. This is the way any company should think long term and also act long term to mitigate any threats to its existence or erstwhile revenue streams. This is the way oil-dependent economies should think and act now to mitigate the negative impact of a future with cheap oil.

Questioning quarterly capitalism as right or wrong is not the issue. Rather, it is that Management must be accountable to their shareholders and other stakeholders for their decisions and the future prospects of the companies they manage. This has to be within the context of clear strategies for differentiation even in challenging economic times. There can be little doubt that one of the key metrics for successful companies is longevity. Only companies that survive can grow and continue to deliver value to shareholders and stakeholders alike. Economies in turn can only grow when well-run companies also grow sustainably. It certainly makes sense that successful companies will be distinguished from the rest not by their obsessive focus on short term results but by their holistic focus on continuously creating value for shareholders and stakeholders in the medium to long term. This requires bold leadership, focus and deliberate action, now and into the future.

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