Public confidence in large corporations is at an all time low. With catastrophizing effects of climate change, income disparity and growing monopoly of technology giants, one in three respondents on a recent poll were weary of big business.
The problem however is not in long term value creation but in the focus on the short term. Hitting growth, revenue and profit milestones for companies to show their investors quarter-on-quarter results loses sight of the long-term. Those companies that conflate a short-term focus to value creation put both shareholders and stakeholders at risk. A good manager focuses on safety, keeps value enhancing principles in mind, does not get pressured to take risky decisions because of peer pressure and does not fudge accounts to boost short-term returns.
Long term value creation should contribute towards bolstering the economy, improve standard of living and provide more opportunities for people to grow as individuals. Value creating capitalism has helped millions lift from poverty, increased literacy rates and encouraged innovation that enhances quality of life and expands life expectancy.
Shareholder value increases with companies that engage with social and governmental needs. For example, Google Classroom gives teachers free tools to engage students and reach communities of children who might not be able to access digital education at all. Sodexo on the other hand has made a commitment to a gender balanced manager base. This initiative has helped Sodexo retain employees, clients and increased operating margins by at least 8% on all counts.
It is not easy to align all stakeholders such that it is a win-win situation for all. Companies that do not take care of their employees by underpaying them, shortchanging them on benefits and have an unprofessional work environment will be unable to retain employees over the long term. If companies treat employees well, invest in their training and create a conducive work environment, it will benefit the company by creating good products, increase toplines and retain a good workforce.
Another aspect to consider is the price point. Companies should decide a price that is attractive to consumers such that it encourages them to be loyal to the company across products and they continue to buy newer versions of products. The price point should provide value to customers but also shareholders. Such a decision on price can be taken if the company takes a long term view.
Sometimes plants and factories that are making losses continue to run because they provide employment and political pressure does not allow corporates to shut down loss making entities. Therefore managers need to look at the bottom line but also take into account many other factors to ensure that they continue to create value for all stakeholders.
Thinking long-term creates value and there is no doubt about that. Often it is the short-term that is considered to be problematic. Even if there was a way to discard short-termism the foundational issues that arise in value creation would probably still persist. Sometimes external circumstances, where neither focusing on stakeholders or shareholders can help managers make decisions. This instance comes to the fore when company related issues affect people who are not directly associated with the company. An apt example of this would be carbon emissions which is a challenging decision to make as there is no standard procedure to arrive at a decision and make trade-offs. Large companies in the energy sector are taking active steps to reduce carbon emission by linking executive compensation to emission targets.
For one company to tackle issues like climate change that has long reaching impacts is complex and therefore governments and investors need to step up and take centre stage. Incentives, public policy initiatives and taxes can discourage the use of polluting energy sources. Market driven innovation that allows creative destruction to introduce cleaner, efficient and sustainable sources of power. The balancing of economic benefits and time horizons is what governments usually take charge of.
Pension funds which take care of millions of individuals’ financial futures can play an important supporting role as institutional investors. Investors concerned with environmental factors like climate change, carbon footprint, global warming, water scarcity and land decay connect sustainability with long term value creation. Investors are more astute and companies that have adopted the long term perspective must attune themselves to the needs of these investors while responding to governments at the same time. These companies need to adjust their strategy over 5, 10 or 20 years. This will help them reduce risks like large inventories, illiquid assets or productive assets that can’t be used due to other externalities.
However, governments and investors who are invested for the long term may not always be effective in the roles they play. Breakdowns, out of control prices and misallocated resources can cause stakeholders and shareholders to be at odds with each other, creating stressors and divisions. Despite all this, it is in the interest of shareholders and stakeholders to keep their goals aligned. Businesses create value that has a long lasting impact and doing it in a manner that is sustainable is the responsibility of shareholders, consumers, governments and suppliers. A myopic, short-term view shortchanges the constituents involved. On the other hand, a long term commitment takes a broad based view of the interests of the participating parties. This may not be the panacea of every social evil but a commitment to value creation that is designed for the long haul is something valuable in itself.