Long-term growth versus short-term gain?
Creating financial value provides the impetus for all business and, in the broadest sense, this value is created through work. Both can be measured and what can be measured can be distilled into a headline-grabbing figure of profit made or output enhanced.
But from our privileged position at Luminous, where we read hundreds of annual reports every year, the temptation to grab the headlines all too often leads to ignoring other key drivers of long-term value. According to an EY report on long-term value, more than half of an organisation’s value can be attributed to intangibles such as its employees, brand, reputation, technology and client base. Yet how often do you see such intangibles clearly accounted for in company reports? Put another way, if a company does not report clearly on its non-financial drivers of value, shareholders are missing out on half the story of the company’s success!
So what can be done? Investors have a lot of power to work with companies to change things, starting with the realisation that the pursuit of short-term profit at the expense of long-term value creation is unsustainable. But the role of the long-term investor is not just to understand long-term trends; it requires an overall view of the market and its connectivity, and a broad view of how ESG matters affect the capital markets.
Narrow financial measures lead to short-term indicators that do not reflect a company’s true value. And companies must take ownership of the ‘runway’ before them if they are to take off for the long haul to sustainable success. Flash-in-the-pan chief executive tenures (where rewards are linked to current-year financial performance alone), under-investment and disregard for human capital are all symptoms of short-termism and the potential for a bumpy landing.
Taking a long-term view helps to chart the route forward, especially in a world uncertain of the exact nature of the business environment in which it will be operating in just two or three years’ time. FCLT Global (specialists in looking beyond the business horizon), in partnership with McKinsey, researched the performance of companies with a long-term value focus. Published in the Harvard Business Review, the results indicate that ‘companies that manage for long-term value creation have consistently outperformed their peers since 2001, across almost every financial metric that matters’. McKinsey released its own discussion paper in this area, ‘Measuring the Economic Impact of Short-termism’. Its findings are that firms with a long-term view exhibit stronger fundamentals, deliver superior financial performance, retain investment in difficult times and add more to general economic output and growth than those whose focus falls mainly on the next quarter or half-year figures.