The leaders of the Chinese Communist Party are not known for their sense of humour, but every once in a while, one of them comes out with a classic. It was 1972 and Zhou Enlai, the first Premier of the People’s Republic, was asked what he thought about the 1789 French Revolution, nearly 200 years earlier. He paused, and then replied: “Too soon to tell.”
His quip has since become shorthand for the difference between how the West and the East differ in their understanding of the phrase ‘long term’. In this analysis, the West is hopelessly obsessed with short term gain, while the East contemplates and accumulates from a standpoint of considered wisdom.
Cheap stereotyping? Perhaps. But not when it comes to listed companies’ behaviour. Forced in the name of disclosure and transparency to make quarterly reports on their financial performance to the market, CEOs are fixated with telling them what they want to hear, taking decisions in order to reach short term goals rather than acting in the long-term interests of the company.
The markets and the media are hungry beasts, demanding not just growth, but outperformance. Companies can report a healthy rise in profits only for the share price to fall as it didn’t meet previously communicated targets or analysts’ expectations. This decline in the share price is then reported in the media as a CEO failure.
Even worse, CEO pay is increasingly connected to reaching short term goals, including share price targets. Long term challenges such as retaining top talent and costly research and development, for example, don’t offer the markets the sugar high they demand. Little surprise CEOs are so focused on keeping the share price up.
The uncomfortable truth is that even when companies are performing well, an increasingly high percentage of earnings is being allocated to keeping the markets.
The effects are obvious. Globally, investment in long term corporate expansion is at its lowest level since the end of World War 2. Dividends and share price-friendly schemes are favoured over taking tough or costly decisions that will only pay off over time. In the UK in 1970, GBP10 of every GBP100 of profit was distributed to shareholders. Today, under pressure from shareholders, it is around GBP70.
Companies’ slave-like devotion to their shareholders is also curious. The reality is shareholders couldn’t care less about them. No more than a generation ago, the average shareholder owned shares in a company for around 6 years. Today, it is an average of less than 6 months. As algo-rhythmic trading gathers pace, this is dropping to a matter of seconds.
It is tragic that something as successful as the stock market in driving dynamic capitalism is being undermined by these developments. Markets have not always been obsessed with the short term and managers have not always been infatuated with quarterly performance. Markets and listings are excellent ways to raise capital, spur growth, create jobs and foster innovation.
But what has happened over the last two decades – supercharged by the media – is that shareholders’ have been given an importance they simply don’t deserve. They need to be knocked off their pedestal and placed at the same level as other equally important entities for a company – workers, customers and clients.
The challenge for a modern CEO in a company that is seeking a listing is to rethink these priorities. The simple exercise of making sure the interests of workers, customers and clients are as important as the interests of shareholders would fundamentally change management behaviour and break the fixation with the short term.
The time has come for two fundamental concepts to be redefined: equity and transparency.
Equity should not refer to shares investors own, but to the absolute equality of the interests of shareholders, workers, customers and clients. None should be more important than the other.
Transparency should mean that shareholders, analysts and the media measure the transparency of a company by assessing how effectively it has addressed the needs of these stakeholders, not by how much financial information they make available.
The days of solely assessing the performance of a listed company solely by assessing its share price performance, earnings growth, margin development and targets would thankfully be over. Instead, these elements would be placed alongside how the interests of workers, customers and clients had been advanced by the decisions the CEO and management had made.
The result will be that any short term negative financial performance can be placed in a broader and more tolerant context, smoothing out volatile share price movements and extending the average length of share ownership.
Over time, this would promote long-term performance, and this would by extension boost profitability, employment, growth and innovation.
The only real question is this: are today’s CEOs capable of caring less about themselves and their paychecks and more about their long-term moral responsibilities?
