AS AMERICA’S economy has misfired over the past decade, several grand theories have emerged about what went wrong. Economists fret about secular stagnation, debt hangovers and whether demography explains sluggish growth. In American boardrooms, meanwhile, a widely held view is that a dangerous short-termism has taken hold. This theory contends that investors and executives have become myopic, leading firms to invest too little. Like many business ideas, short-termism fits the experience of some individual business people.
Jeff Immelt ran GE for 16 years. He radically transformed the company from a classic conglomerate that did everything to one that focused on its core industrial businesses. He sold off slower-growth, low-tech, and nonindustrial businesses — financial services, media, entertainment, plastics, and appliances. He doubled GE’s investment in R&D.
What makes a CEO effective? The question has been studied extensively, of course, including in HBR. Yet we still know fairly little about how CEOs behave day-to-day and how their behavior relates to the success or failure of the companies they run. Previous studies have typically had limitations. Some have been of small samples, or relied heavily on the researchers’ interpretation to classify different “types” of executive.
Policymakers and pundits alike have been raging against "short-termism" on the part of corporate managers for decades. The critique is well-known: pressured by Wall Street analysts and investors poised to exit at the drop of a disappointing quarterly number, CEOs inflate short-term results to the detriment of long-term performance. But there has been precious little hard evidence that a failure to think long term actually harms companies' performance — and, more broadly, the performance of the American economy. That is, until now.
Ask any sports fan about their favorite team and they will usually spend half the time either cursing or extolling the manager. Apparently, the manager is responsible for every loss, and perhaps even the occasional victory. Enter any pub in England during soccer season and you will find hundreds of angry, red-faced fans shouting insults to the TV, many of them directed at the manager.
It’s an established fact that the life cycles of companies and many products have been shrinking. But what’s often not appreciated is that culture also has a life cycle and that it, too, is getting shorter.
Ask any sports fan about their favorite team and they will usually spend half the time either cursing or extolling the manager. Apparently, the manager is responsible for every loss, and perhaps even the occasional victory. Enter any pub in England during soccer season and you will find hundreds of angry, red-faced fans shouting insults to the TV, many of them directed at the manager.
For most of the past 50 years, business leaders viewed financial capital as their most precious resource. They worked hard to ensure that every penny went to funding only the most promising projects. A generation of executives was taught to apply hurdle rates that reflected the high capital costs prevalent for most of the 1980s and 1990s. And companies like General Electric and Berkshire Hathaway were lauded for the discipline with which they invested.
Our new Corporate Horizon Index provides systematic evidence that a long-term approach can lead to superior performance for revenue and earnings, investment, market capitalization, and job creation.
It’s not surprising that many executives think about growth primarily in terms of acquisitions. For some, opportunities to grow organically are limited, especially in maturing or contracting product markets. Others are drawn to the allure of high-profile deal making, with its virtually instant boost to revenues and often earnings per share as well.
