The Hindu Business Line : Short-term pressures on management

A FUNDAMENTAL question that strategy deals with concerns the decisions and actions that a firm must undertake to ensure desired long-term performance. The decisions need to be taken today but the results may only be perceived in the long term, which makes for a rather ambiguous situation.

The pharmaceutical industry presents the extreme case of such decisions. A manager would have to make a decision now on how much to invest in a stream of research that only may result in a product ready and approved for the market 15 years hence.

At the same time, many of the decisions and actions of an organisation would be directed to meet short-term ends too, and those would satisfy the strategist as long as they did not conflict with the long-term intent of the organisation. A charitable view may be that the short-terms add up to the long term.

But, as Keynes is famously remembered to have said, in the long run, we are all dead. Does that mean we should ignore the long term and let it take care of itself?

US corporations are among the more competitive and successful ones in the world today and they have, for long, been accused of being very short term-oriented. The CEO is accused of keeping one eye on the quarter's results, which have to be reported to the regulators and the stock exchange.

New evidence supports this presumption of behaviour. A study by professors at the Duke University and the University of Washington (and reported in the Wall Street Journal in April) shows that if given a choice between meeting the performance expectations of analysts for this quarter versus missing them so as to meet a long-term objective, most companies would prefer to go with the short term.

The professors surveyed financial executives at 401 firms and also conducted interviews with some of them. About 80 per cent of the respondents said that they would cut spending on items such as research, advertising, and so on, so as to meet earnings expectations.

Some executives mentioned how they may put off repairs or maintenance of equipment even though it may mean more costly repairs later. Executives would delay starting a new project and book revenues now than later.

It is not just the market analysts who put short-term pressures on the decision-makers of the organisation. Consider the investors. A majority of the shareholders of US corporations today are not individuals who invest in the stock and stuff it into their mattresses for the future. Instead, they are mutual funds whose own share price depends on a daily basis on the price of the stock they hold in the fund.

The fund managers are sitting in front of screens monitoring share prices in addition to other measures of performance and are quite happy to move in and out of companies that do not meet their objectives. Holding periods for shares traded on the New York Stock Exchange has now dropped to less than a year. Other large institutional investors such as pension funds are not averse to calling up the management of companies and querying them on their prospects, major corporate initiatives, and so on.

A corporate chieftain with an eye on stock price would be hard put to deflect pressures from these individuals.

In October 2003, the board of Kodak, the film company, was faced with a major challenge from a group of shareholders.

The company wished to move away from its traditional film business which was in decline and instead to invest money (partly by deferring dividends) in new digital technologies as a major strategic reorientation of the organisation.

However, this group of investors which included mutual funds wanted the company to pay out a higher dividend and continue to milk the traditional businesses. They would rather see their gains now than wait for an uncertain future. Thus, the interests of `owners' are not always synonymous with the long-term view.

Collectively, all these organisations and interest groups are putting short-term pressures on the organisation. If the firm's decision-makers were keen on pleasing the intent of each one of them, we would have the situation like the tale of the dhobhi on his way to the river bank who was being influenced by the varying comments of the passers by.

When he rode the donkey, they blamed him for letting his young son walk. When the son rode the donkey, they blamed the son for letting the old man walk alongside. Then, when father and son got onto the donkey, it collapsed.

Perhaps the real issues which are hidden behind the short-term versus long-term debate in the study reported earlier is that managers are eager and willing to `manage' earnings. Are they using analysts and investors' expectations as an excuse to hide behind?

The plethora of scandals that have erupted in the last few years all hinge around accounting manipulations and many can be traced to the desire to manage earnings.

If performance is poor, rather than admit it, the motivation to manage the presentation of the performance can be driven by the fact that many senior managers in the US are given stock options that are triggered by stock prices.

The desire to influence the stock price, driven by a motivation for personal gain, has resulted in manipulating the accounts of the organisation.

We would do well to remember what other managers have voiced. Bill George, the former CEO of Medtronics, a medical devices company, said a few years ago that he began every annual stockholders meeting with the assertion that the company does not believe in maximising shareholder value but in maximising value to the patients they serve.

Since it is a company that has handsomely delivered shareholder value, the point he was making was that in having a clear sense of purpose for the organisation and looking to the long term, the short-term objectives also get met.

So, the debate is not really whether one succumbs to the short-term interests of external agents, or whether the short-term blends into the long term. If you are clear about your vision for the long term, the short-term will take care of itself. Now, I wonder what Keynes would have had to say about that.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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