Visionary attribute 3: look further forward to create sustainable value
The debate about prioritizing short-term financial performance or long-term value creation has been raging for over a century. More recently, it has intensified, driven by the challenge of several short-term financial pressures.
In 1919, the Michigan Supreme Court held that Henry Ford had to operate Ford Motor Company in the interests of its shareholders, rather than for the benefit of his employees or other stakeholder groups. This case has been often cited as the main support for the idea of “shareholder supremacy” in the US and elsewhere. Milton Friedman's work on shareholder theory in the 1970s cemented the idea that shareholders should be considered more important than other stakeholder groups.
However, this created the potential conflict between generating short-term financial returns for shareholders and creating longer-term value for all stakeholder groups.
First, the growing base of investors with a limited length of share ownership creates pressure on boards to focus on the short-term share price. Second, the continued emphasis on short-term disclosures within listed companies, including quarterly returns and earnings guidance, tends to reinforce the focus on the near-term. Third, how CEO success is measured, by linking executive renumeration to short-term financial or market metrics, reinforces a focus on quarter-by-quarter or year-by-year performance.
But times are changing.
The debate about the role of business in society has progressed, as has the realization that some transformation programs, especially the shift to become net-carbon neutral, have a longer horizon than the next fiscal quarter or year. Leaders almost universally recognize the need to have a broader story to tell stakeholders around long-term value creation: among value visionaries, 99% regard it as critical or important; among pragmatists 79%.
Value visionaries have managed to square this circle. Focusing on the longer-term does not need to be at the expense of short-term gains. Continually assessing relative performance, the evolving competitive landscape, and being aware of changes in the wider business environment are enabling these CEOs to more successfully navigate the impact of the pandemic. They now look to emerge from it faster and stronger.