Focus On The Short-Term Hurts Companies

This article originally appeared on the Wall Street Journal Web site on October 29th.

We have passed through the eye of the worst financial storm in 80 years, but now we have to deal with the devastation left behind. In its wake the Great Recession destroyed trillions in economic value and left 25 million Americans, or 17 percent of the work force, without full-time jobs.

Those who fear a repeat crisis are right to be concerned. We have endured similar crises before like the savings and loan debacle, the collapse of Long-Term Capital Management, and the dot com implosion. Unfortunately, Wall Street ignored these lessons and recreated the short-term practices leading to the 2008 financial meltdown.

To prevent recurrence, we cannot just pass quick-fix solutions. Measures like regulating executive pay merely treat symptoms of larger problems, and may distract us from actions required to rebuild a sustainable economy.

This crisis wasn't caused by subprime mortgages; it was caused by subprime leadership. Its root cause is leaders who practice short-termism. The culture of short-termism—investing for short-term gains at the expense of long-term accumulation—has taken hold on Wall Street. Managerial capitalism has replaced financial capitalism as holding periods for stocks dropped from eight years in the 1960s to as low as six months today.

Warren Buffett once said that the best holding period is "forever." That philosophy earned him $40 billion and the reputation as America's best investor. Unfortunately, long-term value investing is decidedly out of favor these days. Instead, investors pursuing short-term returns pressure corporate leaders to meet quarterly expectations rather than creating long-term sustainability and growth.

Many corporate leaders fell prey to playing this short-term game. They bought into the widely-believed myths that a company's stock price represents its true economic value and that success can be measured by comparing quarterly earnings to security analysts' expectations.

They hyped their stock prices with short-term actions or made value-destroying acquisitions that crimped their long-term competitiveness, often putting their entire business at risk. Many of their firms, like General Motors, AIG and Citigroup, are barely surviving now.

According to a McKinsey study, 65 to 70 percent of mergers and acquisitions destroy shareholder value. But CEOs seeking quick fixes for long-term strategic problems often ignore these statistical realities.

No sooner do companies complete their merger binges than activist investors buy small ownership positions to pressure management into spin-offs, divestitures, or other balance sheet chicanery. By this time the companies are so loaded down with debt and pressured to meet quarterly earnings expectations that they abandon their strategies and spin off the lifeblood of their businesses.

Harvard University Professor Michael Porter, the world's leading academic strategist, noted recently, "Capital markets can be toxic to strategy." Porter argues that creating economic value is not the same as creating shareholder value because it requires focus on strategic growth instead of short-term earnings. The Aspen Institute echoes this sentiment. It recently issued a clarion call for "Overcoming Short-termism" that was endorsed by 28 national leaders.

The reality is that it still takes nearly a decade to create lasting shareholder value through breakthrough new products like blockbuster drugs, innovative distribution networks like Wal-Mart and Starbucks, or a values-based, collaborative culture like IBM's.

To prevent future crises, we need a new generation of leaders that recognizes the pitfalls inherent to practicing short-termism. These leaders must be ready for the long-haul effort that is required to create sustainable value, even if they have to constrain short-term results.

I am encouraged that many such leaders are emerging at the helm of major companies and Wall Street firms. Dan Vasella of Novartis and Jeff Kindler of Pfizer are transforming their pharmaceutical firms into 21st century health care leaders, just as Indra Nooyi of PepsiCo and Ken Powell of General Mills are becoming role models for developing sustainable consumer goods companies. Richard Davis of U.S. Bancorp and Jamie Dimon of JP Morgan are demonstrating how banks can balance risk-taking with sound financial management.

If the U.S. wants to be the world's leading economic power, President Obama needs to reinforce a long-term focus by shifting his efforts to building a sustainable economy, rather than bowing to pressures for instant gratification. This means refocusing national priorities on health care innovation, renewable energy sources, high-tech manufacturing, and broadened use of information technology. The government can facilitate this shift with a graduated capital gains tax favoring long-term investments and start-up companies, increased permanent R&D tax credits, expanded investment tax credits, and skills-based retraining programs.

Then a new generation of corporate and Wall Street leaders, supported by elected leaders, can build a sustainable economy that creates wealth and jobs for all Americans.

Overzealous Punditry Is Hurting America

Walter Cronkite once said, “Objective journalism and an opinion column are about as similar as the Bible and Playboy magazine.” 

In my opinion, when the latter begins to masquerade as the former – when journalist’s opinions adorn the garbs of objectivity – we face a crisis of journalistic integrity.

This is precisely the situation we find ourselves in today.

A highly partisan culture has emerged in the mainstream and side stream media, releasing a rancor which perpetuates the single-mindedness and inflexible partisanship that now roil the country. “Info-tainers” and shock-jock radio hosts, with rants against opposing party politicians and lambasts of differing viewpoints, contribute little to the constructive debate about how we can fix today’s true problems and continue ensuring that America stays at the respectability forefront.

These media rabble-rousers would not necessarily concern me if they were TV, radio, and internet aberrations, the exceptions to the broadcast-news rule.  But they have become the standard, setting a bar for irrational and incendiary political reporting and bouncing the “vitri-ball” back-and-forth from station to station, from blog to blog.

The sharp divide they engender between parties and politicians is a direct threat to American productivity and progress, and therefore eventually our respectability as an economic and political leader.  Their brand of demonizing politics fosters a culture wherein political stalemates are valued over prudent legislation.  This needs to stop, for everyone’s sake.

As David Gergen and I explored, this socio-political reality can permanently cripple America.  From healthcare reform to climate change, from economic relief to the wars in the Middle East, Americans remain seemingly incapable of reaching anything resembling consensus because politicians and constituents alike have been feeding on this tradition.

Gergen took this conversation a step further in his recent article for the US News and World Report.  Discussing what he sees as a leadership deficit in America, Gergen observes that the current media tone does not help the situation:

The president and his supporters have tended to blame the blogosphere and 24-hour news channels that feature extreme voices and manufacture artificial controversies. They have a point. There was a time in the lives of many today when the culture and the media environment were more civil and the country was more united. The 1940s, '50s, and early '60s had ugly moments—remember McCarthy? And Dallas?—but the overall tone was more positive. Was it any accident that those years also spawned Truman, Marshall, Eisenhower, and Kennedy?

Today’s leaders are facing a no-win situation because the media have pinned them in a corner.  Every decision is either overly lauded or ruthlessly decried.  While accountability is imperative, and while we should continue to ask tough questions, we should also realize that the “shout-them-down” approach serves no long-term purpose and only brings momentary self-satisfaction.  This is engendering a culture of skepticism, disbelief, and partisanship that is detrimental to our hopes for continued progress.

And while I wouldn’t say that overzealous punditry is the root cause of partisan disconnect in America, it is certainly more than just a symptom: it is an accelerator.  Today’s news culture makes things worse.

The President has called time and time again for our country’s leaders to rise above pettiness and assume the mantle of dispassionate, consensus-centric leadership.  I agree wholeheartedly that this culture shift is the only means by which we can hope for a return to prosperity, and must acknowledge that any effort counter to that is hurting our country.

Talking heads cheapen discourse.  They tout easy solutions.  They speak in truculent soundbites.  Their invective hurts America.

Our problems are real.  Let’s discuss them in a real way.

Auto Crucible: Will Americans Drive Chrysler's New Brands?

Fiats and Alfa Romeos will cruise America’s streets again.  But just how many is up to the American consumer.

According to the New York Times, Chrysler will unveil a new product line next week, cutting several poorly performing models – like the Chrysler Sebring – to make room for joint Chrysler-Fiat CEO Sergio Marchionne’s foreign high-performers, like the Fiat 500. 

And in splitting the Dodge brand into separate “Dodge Car” and “Ram Truck” divisions, Mr. Marchionne will have expanded the Chrysler company into six unique brands – this, while General Motors is scaling back its number of brands to four. 

This is all part of an aggressive strategy by Mr. Marchionne to regain Chrysler’s dwindling market cap, and make new strides with two somewhat familiar but mainly exotic (and “environmentally smart”) brands, Fiat and Alfa Romeo.

Given this refreshed approach, bolstered by new brands and a dynamic, consumer oriented leadership under Mr. Marchionne, could we be on the verge of a consumer return to Chrysler?

As one New York Times source said, “I’m sure Americans love Italian suits. Whether they love Italian cars is yet to be seen.”

From a business leadership standpoint I applaud Mr. Marchionne’s confidence and ambition during this American automobile crisis.  He is eliminating sources of waste, i.e. poor performing cars, and introducing new vehicles and technology that are likely to appeal to today’s car buyer who is seeking lower costs and higher efficiency. 

However, the main unknown in this equation is whether or not the American consumer is ready to put their trust back in what is now a tainted Chrysler brand.  The financial crisis not only rocked the automobile industry, it shook consumer confidence in American cars, and Chrysler is no stranger to this trend having seen sales drop 42% in September.

American cars have been outperformed by foreign competitors for years, but its yet to be seen whether this infusion of Italian innovation is enough to bring Chrysler back to market relevancy.

Gridiron Leadership Gap

Under fire for a lackluster season, Washington Redskins head Coach Jim Zorn recently had his play calling duties usurped by owner Dan Snyder.  And though Zorn technically remains the Head Coach and team leader, those duties have transferred, not to a member of his chosen staff, but to an “offensive consultant.”  Coach Zorn’s statements about the change are hardly surprising: "I don't look at that as a positive.”

The Washington Post’s “On Leadership” panel recently examined this issue through the lens of the following question:

“As the Washington Redskins have learned with Coach Jim Zorn, whose play-calling responsibilities were handed over to an offensive consultant, it's tricky bringing in someone to help compensate for a particular weakness of a leader without appearing to undermine his leadership. In your experience, are there effective ways to pull that off, or is it a doomed strategy?”

Some savvy leadership minds weighed in on this issue, and the resounding consensus seemed to be that the course the Skins have taken is a “doomed” leadership strategy.  We all seem to agree that:

1)      “Consultants” cannot function as leaders – it is contrary to the nature of their purpose

2)      Coach Zorn has effectively been stripped of his ability to lead effectively.  The mystique and respect of his position have evaporated as he has been publicly branded as inept.

3)      Dan Snyder should have completely restructured the team’s leadership, or worked from within (and privately) to improve it.  Now he is left without a leader going into a daunting 9-game stretch.

My initial response centered on the idea that there can only be one captain of the ship.  In the same way I am skeptical of dual-CEO structures in business, I’m skeptical of a situation in professional football where there is not a central, galvanizing figure.  Not everyone can be Vince Lombardi, but certainly every team needs one go-to problem solver, one go-to decision-maker.  And if that problem-solver, that master strategist, proves unsuccessful, it is in the organization’s best interest to make a clean break.

Football teams are just like corporations – there is a great deal of talent and consequently a large concentration of healthy egos.  In my experience, the best way to channel those talents and direct those egos is through the effective stewardship of a single authentic, values-driven leader. 

Healthcare Is Not A Popularity Contest

The Washington Post’s Fred Hiatt cut to the public option core in yesterday’s Shirking Cost Control.  On the issue of health care reform he asserts, “The ‘public option’ is dangerous not for what it might do but for what it allows the politicians not to do.”  

According to Hiatt, politicians are attempting to avoid making “unpalatable” political decisions regarding special interests and industry cost-cutting by enacting a solution without proven – and for quite some time, provable – efficacy and cost-saving ability.  Our politicians, he argues, are shirking the real responsibility incumbent to the reform discussion – asking tough questions and reaching bipartisan consensus – and are instead opting to ride the wave of public option popularity (at least among the majority Democrats).

I have my own thoughts on health care reform, but they are beside the point; Hiatt speaks to a reality that plagues political and business leaders alike beyond a single issues such as health care. When faced with difficult issues, leaders often opt to promote popular and self-protecting solutions instead of those that risk popularity in the interest of true, consensus-driven solutions.

This is particularly true in times of crisis.  We only need to look at leaders at firms like AIG, Lehman Brothers, and General Motors for examples of those who made easy, self-serving, and short-term decisions that helped them weather a single storm and make short-term profits, but eventually led to their implosion.

There is no doubt we face a crisis on health care, and that reality no doubt weighs heavily on our politicians as they attempt to frame a solution.  However, it is imperative that they not hide behind potential solutions as a means of shirking the responsibility to find real ones.

Gusto: An Authentic Mask

Earlier this month, Jim Heskett wrote an article for the HBS Working Knowledge series centered on authentic leadership and the “Masks of Command.”  Jim’s article, which highlights several concepts I also explore in Authentic Leadership, spurred a great conversation.  I wanted to respond to one of the issues raised as a means of continuing the dialogue around authentic leadership, a hugely important issue during this time of economic crisis and political hostility. 

Many of those who made comments asked whether transparency equates to authenticity. They highlight the need for authentic leaders to share with their employees their fears and concerns as often and easily as they share their optimistic projections and commendations.  This transparency, they argue, projects a human quality that employees can understand and follow with confidence.

In many respects I agree.  My experience at Litton, Honeywell, and Medtronic taught me that people are far more interested in heeding forthright and candid leaders, than robotic leaders who recycle high-flying rhetoric and blind optimism.

But, as I explore in 7 Lessons for Leading in Crisis, just as it’s important for leaders to be transparent and share their concerns in a crisis (particularly their hand in contributing to that crisis), it is equally important that they then make an about face and project confidence, both internally and externally, in leading the company forward.

Exuberant confidence may sometimes overshadow internal doubts, but this does not create a compromise of authenticity.  Leading with gusto is simply a necessity of strong leadership in a crisis.

Gergen Gets It Right: "A National Deficit - Of Leadership"

As David Gergen explores in his recent US News and World Report article, the release of the "America’s Best Leaders" list could not have come at a more dire – and consequently, opportune – time. 

America is facing not only a national economic deficit, but a national leadership deficit as well.  Gergen explains that a “crisis of confidence” regarding America’s leadership is widespread as people grow increasingly hostile towards, and distrustful of, the President, members of Congress, and many of our other national leaders.

Though by no means unchartered waters – “confidence in government plummeted back in the '60s and '70s and has never really recovered” - this crisis remains a progress-hampering state of affairs.  As David and I discussed during September’s Summit on Leading in Crisis, the political incivility which existed at that time and has continued today holds the potential for violent eruptions (see: 2009 healthcare town hall meetings), and fosters incredible political polarization.  This contentiousness can create political stalemates which risk America’s ability to remain a respectable or capable worldpower across the long-term 

A crisis indeed.

But as we agreed in September, and as I’ve highlighted in 7 lessons for Leading in Crisis, every crisis holds an opportunity for reinvention and improvement.  We should not waste this crisis of confidence; rather we should use it as an opportunity to bare our concerns candidly and see exactly where we as citizens and leaders can improve. 

One way to accomplish this is to highlight the examples set forth by those select leaders who have demonstrated value-driven leadership and maintained track records of accomplishment during this “crisis of confidence.”

Herein lays the timeliness of the America’s Best Leaders List.  We need to see the likes of Eboo Patel for examples of how we can best bring differing faiths together through shared principles.  We should look to folks like Cory Booker as models for effective and diplomatic political leadership.  And we must keep the Greg Mortensons of the world at the forefront as examples of how individuals can have worldwide positive impact.

David Gergen gets it right – we are in the depths of a crisis.  And he gets a potential solution right as well – we need to turn to “America’s Best Leaders” as models for how we can work through that crisis, and come out improved on the other side.

In Reponse To Comments On "Let's Stop Vilifying The Bankers"

I recently wrote an article for the New York Times - Let's Stop Vilifying the Bankers - and subsequently saw a large number of comments on the website in response.

I wanted to be sure that I took some time to respond to those questions and insights as a way of continuing what I have found so far to be a very important discussion on banks and the financial crisis (two very important, and timely, subjects).  You can see my response article here.

As always, I would enjoy your feedback.

Pulling the Weeds, Missing the Root

Today’s news cycle marks the first wave of reaction to the Treasury and Federal Reserve’s announcements on Wall Street compensation.  Inevitably, speculation has abounded as to the new policies’ long-term impact on Wall Street.

Critics howl that pay regulations will create a talent vacuum with top executives and traders heading for greener, i.e. less regulated, pastures.  Others rumble that regulations aren’t restrictive enough and simply allow firms to keep total compensation the same by changing the way it’s doled out.  Still others, while significantly less skeptical, believe that shareholders must take an active role in regulating compensation.  President Obama shares this view as well.

I agree that a change in Wall Street culture is needed, but executive compensation is just pulling at the weeds of the larger problem.  I think the main problem is the culture of short-termism – investing for short-term gains at the expense of long-term planning – that has taken root on Wall Street. We should align our efforts around combating this culture instead of setting arbitrary limits on compensation.

In my experience, the best way to enact long-term behavioral change is by incentivizing it.  That’s why I’ve joined the likes of Warren Buffett and John Bogle in signing the Aspen Institute's Statement “Overcoming Short-Termism.”  In promoting these ideals, we can reach the desired end of a responsible financial and banking sector and can maintain that change across the long term.

I’m currently writing an article where I take a deeper dive on this very subject.  I‘ll be sure to post it here as I will be very interested to garner everyone’s feedback. 

40 (+8) Faces of Business Leadership in 2009

Fortune Magazine released its “40 under 40” today listing the 40 most powerful business leaders under the age of 40.  Simultaneously, it released its “8 over 80.”  Here are a just a few things I found interesting:

-          The online sector is by and large the most well-represented.  Seventeen of the 40 would be characterized as “online” leaders, from Sergey Brin and Larry Page at Google, to Tim Armstrong at AOL, to Raul Vazquez at Walmart.com. 

-          There’s an undercurrent of “risk pays” in the list.  For example, Mark Zuckerberg dropped out of college to start-up Facebook, a venture he’s now grown into a multi-million dollar business.  I became curious about college drop-out statistics, so I Googled “College Dropout.”  The first result was a fittingly titled Web site “Billionaire College Dropouts,” which profiled such renowned business leaders as Sir Richard Branson, Steve Jobs, Michael Dell, and Kirk Kerkorian, who’s coincidentally profiled in the“8 over 80.”

-          It’s services and entertainment over product.  Only 20% of the “40 under 40” create and sell a product.  The rest provide a service or entertainment.  Contrast that with the “8 over 80,” where that ratio is effectively turned over, and we see fundamental shift.