When executives consistently make decisions and investments with long-term objectives in mind, their companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. Data also show that companies can achieve better long-term performance when they address the interests of employees, customers, and other stakeholders.
In one data point, respondents said they believed their companies would cut long-term growth investments by 17 percent, on average, when faced with a 15 percent decrease in revenue even though the survey specified that the dip resulted from external factors (such as currency fluctuations), would not imperil the company’s existence, and would not persist.
We wanted to understand better what differentiates long-term-oriented companies from others. How have they sidestepped the pressures? We reviewed and synthesized our own research and that of others in academia and the business world. We also surveyed executives and analyzed data on management and corporate performance. In the process, we identified five behaviors that managers and boards can take to reorient their organizations toward long-term value creation rather than just short-term performance:
- Invest sufficient capital and talent in large, risky initiatives to achieve a winning position.
- Construct a portfolio of strategic initiatives that deliver returns exceeding the cost of capital.
- Dynamically allocate capital and talent (through divestitures, if need be) to the businesses and initiatives that create the most value.
- Generate value not only for shareholders but also for employees, customers, and other stakeholders.
- Resist the temptation to take actions that boost short-term profits.
Global executives who choose to take these actions can, apart from gaining clear performance advantages for their organizations, resolve much of the perceived conflict between stakeholders’ interests and shareholders’ interests. In fact, the two sets of interests largely converge in the long run. Companies create long-term value for investors only when they satisfy customers, engage and motivate employees, and maintain good relations with communities and regulators across extended time horizons.