Corporate long-term behaviors: How CEOs and boards drive sustained value creation
Although the advantages of maintaining a long-term orientation are clear, the practical aspects of managing for long-term performance are less well understood. FCLTGlobal and McKinsey have published joint studies revealing a few things that long-term companies don’t do, such as invest modestly in R&D and use accounting methods to lift reported earnings. In this report, we build on that analysis to identify the behaviors that long-term companies consistently exhibit. We also propose actions that boards and executives can take to promote these behaviors.
Ample evidence shows that companies create more value for investors when executives consistently make decisions and investments with long-term objectives in mind. Addressing the interests of all stakeholders also leads to better long-term performance. The future, it seems, should belong to managers who have a long-term orientation and accept the importance of treating various stakeholders fairly.
Nevertheless, our research shows that behavior focused on short-term benefits has risen in recent years. In a survey conducted for this report, executives say they continue to feel pressure from shareholders and directors to meet their near-term earnings targets at the expense of strategies designed for the long term. Managers say they believe their CEOs would redirect capital and other resources, such as talent, away from strategic initiatives just to meet short-term financial goals.
Executives may continue to focus on short-term results because adopting a long-term orientation can be challenging. While previous research has established that long-term companies perform better in the long run, it has not identified the management behaviors that enable them to do so. This report represents our attempt to fill this gap. In it, we show that long-term companies adhere to five behaviors, and we provide evidence that those behaviors work:
Investing sufficient capital and talent in large, risky initiatives to achieve a winning position. Many established businesses have developed an aversion to risky bets. Instead of playing to win, they play not to lose—and so they struggle to stay in front of competitors. Long-term companies identify strategic moves that will keep them ahead in the long run and commit ample resources to strategic initiatives such as product innovation, marketing and sales, and talent development.
Constructing a portfolio of strategic initiatives that delivers returns exceeding the cost of capital. Growth alone won’t deliver value. Companies must devote resources to endeavors that produce returns in excess of the cost of capital. Not every investment that a company makes has to earn more than its cost of capital. But if the entire portfolio of strategic initiatives earns more than its aggregate cost of capital, then a company can expect to create value over the long term.
Dynamically allocating capital and talent—via divestitures, if need be—to businesses and initiatives that create the most value. Running a long-term company does not equate to maintaining the same business mix for extended time spans. Managing for the long term requires executives to monitor the company’s standing and enter or exit businesses as the competitive landscape shifts (via acquisitions and divestitures, when necessary). Companies must also reallocate talent as frequently as they reallocate capital.
Generating value not only for shareholders but also for employees, customers, and other stakeholders. Long-term companies focus on improving outcomes for all their stakeholders, not just those who own shares in the business. They have good reasons to do so. Motivated employees get more done than disgruntled ones. Well-treated suppliers work together more collaboratively. Satisfied regulators are more likely to award operating licenses. While executives must consider trade-offs among the interests of their constituents every day, over the long term, the interests of shareholders and stakeholders converge.
Staying the long-term course by resisting the temptation to take actions that boost short-term profits. When temporary changes in fortune occur—dips in revenue, for example—maneuvers that boost short-term results take on a powerful appeal. Long-term companies resist three temptations: starving growth investments, cutting costs that could weaken the company’s competitive position, and making ultimately uneconomic choices just to reduce the natural volatility in revenue and earnings.
To reorient companies toward long-term objectives, business leaders must adopt new behaviors and abandon unproductive ones while empowering managers to make decisions with long-term outcomes in mind. To help corporate directors and executives get started, we have identified a few things that they can do.
Boards of directors can help orient management toward the long-term in three ways:
Ensuring that strategic investments are fully funded each year and have the appropriate talent assigned to them
Evaluating the CEO on the quality and execution of the company’s strategy, the company’s culture, and the strength of the management team, not just on near-term financial performance
Structuring executive compensation over longer time horizons—including time after executives leave the company
CEOs can reorient their companies by using their influence and authority in four ways:
Personally ensuring that strategic initiatives are funded and staffed properly and protected from short-term earnings pressure
Adapting the management system to encourage bold risk taking and to counter biased decision making
Proactively identifying and engaging long-term oriented investors—and having the courage to ignore short-term shareholders and other members of the investment community
Demonstrating the link between financial and nontraditional metrics to prevent short-term trade-offs
We believe that these management behaviors and tactics can benefit business leaders as well as investors across nearly every location and industry. Even with the benefit of this research, all companies will find managing for long-term performance a complex endeavor, one that would be informed by further research on topics such as the board behaviors and CEO traits that are conducive to long-term performance or executive-compensation structures that give CEOs strong incentives to adopt a long-term orientation. But executives should not take this complexity as reason to wait. The sooner they adopt long-term behaviors, the sooner they will achieve the performance gains that produce value for stakeholders over the long run.
22 May 2023 - Carine Smith Ihenacho, Chief Governance and Compliance Officer at Norges Bank Investment Management, joins the podcast to discuss what responsible investment means to NBIM, the challenges and obstacles of implementing a responsible investing approach, and what differentiates NBIM from other large-scale institutional investors.
16 May 2023 - FCLTGlobal has announced Jess Gaspar as new Head of Research. In this role, Gaspar will shape the organization’s research agenda, oversee its research staff, and work with external stakeholders, including FCLTGlobal’s members, to advance key objectives.
12 May 2023 - It’s trendy to bemoan the fact that a third of Americans don’t have enough slack in their monthly budget to cover a surprise $400 expense. What about investment institutions in an equivalent scenario?