Author: Thimon de Jong - Whetston Strategic Foresight
The best way to understand the asset managers’ initiative is by turning to Larry Fink of BlackRock. His latest letter (February 2016) to the CEOs of S&P 500 companies and large European corporations is instructive. He essentially urged them to take a long-term view in order to generate sustainable returns over time.
This was not Larry Fink’s first letter calling them to action. In fact, his letter shows signs of frustration.
Over the past several years, I have written to the CEOs of leading companies urging resistance to the powerful forces of short-termism […] many companies continue to engage in practices that may undermine their ability to invest for the future. […] Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need.
Nobody in the business community uses the word short-termism – as it has a negative connotation. But everybody uses the word disruption, which has become a business mantra. It is common opinion that we live in an era of constant disruption and that the world is changing faster than ever before. This disruption mantra is fuelling ‘short-termism’ as it entails that every company needs to be agile, flexible and ready to change its course – preferably on a daily basis.
Where does this obsession with disruption and the ‘short-term quarterly earnings hysteria’ come from? Some say we have to go all the way back to Schumpeter’s theory of creative destruction, which he expounded in the 1940’s. The current hype, however, started much later: in 1995. In that year Harvard professor Clayton Christensen introduced the world to the term ‘disruptive innovation’ in his article Disruptive Technologies: Catching the Wave, which he further developed in his book The Innovators Dilemma, published in 1997. It was exactly the right theory at the right time: catching the excitement of the new-fangled internet and the exuberance of the dot-com boom of the late 1990’s.
The subsequent dot-com crash in 2000 was merely a brief interlude in the eyes of disruption fans. As the web matured over the first decade of this century disruption became the norm, regardless of the kind of organisation. As Jill Lepore, professor of history at Harvard, put it in 2014: ‘Ever since The Innovator’s Dilemma everyone is either disrupting or being disrupted.’ For start-ups today to get investors on board they need to present themselves as ready to disrupt at least one entire industry – and in as little time as possible. That is what is written in all of the handbooks for start-ups: this is what investors want to hear.
Executives of established organisations are in a similar situation. They are told over and over again by business consultants, futurists and management book authors that there is plenty of disruption still to come, so they have to keep disrupting. It is not about next week or next month – do it instantly or you will be the next Kodak or Nokia. The theory of disruption has firmly taken root at business schools around the world. The University of Southern California even offers a degree programme entitled ‘The degree is in disruption’. There are more than 4,000 results for books on ‘disruptive innovation’ on Amazon!
This disruption rhetoric alarms business leaders. A recent survey of banking CEOs showed they were more afraid of fintech companies than of their traditional competitors. They fear their industry will be ‘uberized’ and they will be a disruptive company’s prospective ‘lunch’. Harvard’s Jill Lepore puts it bluntly: ‘The disruption mind-set is transfixed by change, and blind to continuity. […] Disruptive innovation is a competitive strategy for an age seized by terror.’
Alongside this angst, there is the compelling opportunity to become – or invest in – the next unicorn. This has to be done at a break-neck pace – if a start-up does not rise to stardom like one of Elon Musk’s Space X rockets, investors and talent will jump ship. The statistics are quite staggering: according to various studies, between 75% and 90% of start-ups fail. Investors and talent are like Las Vegas gamblers: they are very excited and hope to win the jackpot, but the odds are against them.
It often seems as if disruption is the only path to progress. Yet is this real progress, when the costs of disruptive change are so high? Many businesses seem to have forgotten that growth can also be achieved with slow and steady incremental progress. Larry Fink calls this long-term value creation. It is more than just shareholder value. In his 2016 letter he states:
Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. […] Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts. […] At companies where ESG issues are handled well, they are often a signal of operational excellence.
There is strong evidence this is a winning strategy, paradoxically even for start-ups. A comprehensive study of start-ups by Wharton University showed that so-called ‘improvers’ are five times more likely to succeed than ‘first movers’.
A classic example of incremental progress is the Volkswagen Transporter van, which was first launched in 1961. Every generation of this van has been a little bit better than its predecessor and a bestseller in its category. In 2015 the sixth generation of the van was launched, which looked strikingly similar to the fifth generation. Volkswagen said it could not improve much upon perfection, and launched the new model in some countries with the brilliant slogan: ‘The New Volkswagen Transporter: More of the Same.’
Volkswagen’s current crisis probably precludes it from the secret society’s list of long-termism best practices. Something that probably will make it on to the list is Unilever’s much-publicised decision to abandon quarterly reporting. The rationale is to discourage executives from pursuing short-term goals at the expense of realising long-term, sustainable ambitions. Unilever’s CEO Paul Polman has stated that ‘it [has] worked out well […] you need to give a lot of people the courage, the permission, to do it. We want businesspeople that have deeper purposes that guide them long-term.’ We will have to wait for Larry Fink et al for more inspiring examples.
In order to better understand businesses’ behaviour things also have to be viewed with a broader scope. Short-termism is part of the much broader sociocultural trend that the whole of society is increasingly focused on today, instead of tomorrow. This is the topic of part two.