The marketplace is still feeling some of the fallout from the financial crisis. One of the things that companies are still dealing with is the pressure to meeting quarterly projections for earnings. While meeting short-term goals helps to appease shareholders, many boards are still inclined to put long-term strategies on the back burner in favor of demonstrating immediate strong returns for shareholders.
The profile of investors has changed, causing some to insist or demand that companies deliver well in the short term. While short-term results are important, it’s the long-term results that sustain companies over the long run. One of the many challenges that companies continue to wrestle with is how to regain enough confidence from shareholders to make the switch from focusing on short-term returns to focusing more heavily on long-term returns. The continuing practice of emphasizing short-term profits steers board directors and executives away from spending adequate time on strategic goals.
Regaining a Sense of Balance Between Short- and Long-Term Planning
With the balance of short- and long-term planning so out of kilter, how do companies regain a sense of balance? Many CEOs, investors and regulators feel that it’s time to get everyone moving back in the direction of planning for the long term.
As part of Focusing Capital on the Long-Term Initiative, board directors and executives presented their views on what it will take to turn things around. In March 2015, corporate leaders launched an essay collection called “Perspectives on the Long Term: Building a Stronger Foundation for Tomorrow” at the Long-Term Summit in New York.
In making the shift to long-termism, boards will need to seek board directors who are interested in taking the long-term view, as defined by how the board views its responsibilities to shareholders. The financial crisis should be far enough behind us that boards can begin to examine their own motives for the decisions they make about satisfying impatient shareholders or collaborating with executives on creating a stronger long-term vision for the company. At the same time, boards may need to be cognizant that making the switch too fast may incite criticism and mistrust for a time.
Transitioning Toward Long-Term Vision and Strategy
The first issue for boards to visit is determining how they define “long term.” For many companies, short-term means a year or less, intermediate-term is from one to five years and long-term is more than five years. Other boards consider the definition of short-term as one to three years and long-term, three to five years or longer.
There’s been a movement toward increasing the number of independent board directors on boards. Perhaps what hasn’t happened as readily is appointing the right board directors who are skilled in long-term strategy. Independent directors also have the challenge of urging their boards to spend sufficient time giving it the necessary focus during board meetings.
In recent years, boards have been hesitant to share the long-term vision with shareholders out of concern for criticism. As boards step out of their comfort zone by establishing a long-term vision, it should prompt managers to also focus more heavily on long-term strategies. These changes will form the base for being able to look beyond five years. The best approach may be to address it initially and gradually spend more time on it over time. Long-term strategies will need to evolve in the face of changing circumstances. Boards can also help themselves by bolstering their confidence in communicating the organization’s vision to shareholders and the greater marketplace.
We’re already seeing hints of change in other areas of the world and the European Union is taking the lead. They no longer require publicly listed companies to produce interim statements. This change opens the door for companies to move in the direction of long-term planning.
CEOs are essential components for creating a smooth transition to long-term planning while maintaining stability and instilling reassurance in investors.
Once boards are committed to long-term planning, they need to align their commitment with the right choice of CEO and the right incentive package. After the financial crisis, many boards changed their CEO incentive packages to favor incentives for short-term performance. An important part of making the switch to placing a greater focus on long-term strategizing, boards will need to revise incentives for CEOs accordingly and benchmark them against a relevant group of companies. It’s also wise to hold back some part of the CEO’s incentive package until after the CEO has left the company for two years. The idea behind this is that it will motivate the manager to help his or her successor do well.
Succession Planning, Board Composition and Long-Termism
With so much change happening in the marketplace, mistakes in getting the right board directors and executives in place can be costly. Changes in board directors or CEOs shouldn’t cause changes in the long-term plan, although replacing some individuals may help with implementing the plan. Boards that want to make the switch may benefit by starting it early in a new CEO’s tenure. A dedicated nominating committee is best-suited to follow through with getting the right individuals lined up on the board and in the C-suite. At the same time, they should allow plenty of time for internal candidates to learn more about the plan and prepare them for a future role in it.
Getting back to the practice of paying attention to long-term goals and results is the modern approach to governance in the marketplace. Modern governance is the practice of empowering leaders with insights, processes and taking advantage of the advancements in technology so that businesses can thrive and endure in today’s fast-paced world. NACD and Diligent Corporation have partnered to create a digital tool to help boards compose corporate leadership for today and the future. Nom Gov gives nominating committees the data and analytics they need to spot issues surrounding boardroom diversity, composition, effectiveness and risk profile to elevate board performance.
Learn more about how to build a forward-thinking, modern corporate leadership team in Developing Beyond Your Board Growth Strategies: Building Boards for Long-Termism (pt. 2).