It is how boards and executives think and act in regard to the practice of applying a long-term approach to business and investment decision-making, including focusing on key elements of performance such as competitive advantage, long-term objectives and a strategic plan matched with clear capital allocation priorities. It stands in contrast to short-termism, or a continued focus on quarterly or other near-term performance issues, and is increasingly in demand from stakeholders who want a fundamental rethink around how companies operate and create value.
While the benefit of long-termism is clear, the path to getting there is not. By all accounts, and for a variety of reasons, taking a long-term orientation in business can be difficult, especially for executives. But if the board of directors is committed to taking the long-view, there are a number of specific steps to they can take to get there, beginning with asking a key set of questions:
- As a board, are we satisfied with our company’s performance?
- Is the company being fully valued in the market?
- Is the board playing an appropriate role in creating shareholder value?
Market valuation is a combination of two things: short-term performance and long-term potential. When executives over focus on one of the two – and directors don’t correct course – a company risks becoming either a flash in the pan, or a dreamer that fails to survive long enough to realize its vision. To avoid either fate, boards need to find the right balance between short-term and long-term issues, partner with executives to ensure the company is managed the same way, and engage with the market to build support for their vision and goals. It is no easy task.
Despite these challenges, there are companies that align around a long-term time horizon that successfully oriented themselves this way. In these companies, management and the board share an explicit set of behaviors that focus themselves—and often the investors too—on the long term. How did this happen? And what differentiates those boards of directors that have been the most successful at focusing their company on the long term from those that have not?