Trading Off Long and Short Term

August 25, 2013

360 DegreeA conundrum for most leaders is the issue of long term versus short term results. Most western cultures reward executives based on the short term result. Eastern cultures tend to have a longer view of performance, but even there, patience for short term problems wears thin.

It is easy to say, “Well, you need to do both,” which is a kind of cop out statement. Of course both are needed. If you fail to do right by the long term there is no future for the entity, but if you fail in the short term, there may be no future for you.

Compensation plans for most senior leaders have tended to favor the short term focus. Ethical or legal problems crop up when the pressure for quarterly numbers becomes too great. There are hundreds of stories where companies have pulled material from inventory and called them “sales.” This is an example of an unethical behavior that ultimately causes a crash. Reason: When accounts are juggled in an effort to maximize the short term, the organization is already on a slippery slope. The difference has to be made up sometime, so the long term is in jeopardy.

When you recognize the temptation to “shade” earnings to look most favorable is like a drug, it is easy to see how large corporations get caught in a whirlpool that eventually pulls them under. The Sarbanes Oxley Act was one attempt to make it more difficult to cheat on short term results. In fact, SOX worked! It is more difficult to cheat, but it is also much more expensive to operate, and cheating is still possible. It simply requires more creativity. We should not depend on legislative band-aids to save our corporations.

There is ample evidence that doing business in an ethical manner with a balance of emphasis between long and short term goals is not only more comfortable, it is much more profitable. The Conscious Capitalism Movement is one example of how organizations are finding ways to become more secure, more profitable, and more ethical at the same time. By working to satisfy the needs of all stakeholders rather than just the shareholders, a kind of self-balancing situation arises that is clearly good for business both short term and long term.

John Mackey and Raj Sisodia wrote a book entitled Conscious Capitalism that has started an entire movement. They stress the balance of having all decisions work to satisfy all six stakeholders: 1) Stockholders, 2) Customers, 3) Employees, 4) Suppliers, 5) Community, and 6) Environment. Balancing the needs of all stakeholders gives a better chance at making rational decisions that balance the short and long term benefits to not only the corporation but to society as a whole.

The entire Conscious Capitalism model includes much more than just considering the six stakeholders in decision making. The full model includes:

1. Developing core values and a higher purpose
2. Instilling higher leadership
3. Integrating the needs of all stakeholders
4. Developing a conscious culture of management

The Conscious Capitalism Model is a great way to view business, and I recommend the book to any leader who feels habitually caught between the long term and short term decisions that drive them crazy. It is a very good read that makes a convincing case that doing things the right way from the start is not only less stressful, but far more profitable and sustainable.


Group Punishment

June 30, 2013

Child punishmentIf you have siblings, you remember the drill very well. Your mother comes in and says, “Who knocked over the lamp in the living room?” Of course, nobody knows. She looks around at the children, and each of them is playing dumb. Since she cannot determine whom to blame, she announces the punishment, “Then none of you will get dessert for the rest of the week.”

Group punishments for the sins of a single individual are more common than we think. It happens in the military on a daily basis. If nobody owns up to a misdeed, the entire platoon is penalized with the same punishment as the single guilty soldier would have received. The logic is that one person really is guilty, and the remaining people are guilty of covering up for him, so everyone suffers equally. The leverage is that it puts peer pressure on the guilty person to fess up. In some cases the ploy works, but in others the group solidarity is strong. In the end, the group will find other ways to punish the guilty individual that are not always obvious.

In our society, government has a similar tendency to punish the masses for the sins of the few. It has led to numerous infringements on privacy, like red light cameras, the TSA ordeal we all undergo when trying to get on a plane, gun control, and countless other well-meaning laws and policies that are meant to save the many from the excesses of the few.

Here is another example of the government punishing everyone for the sins of a few. Every publicly-owned company has been forced to spend large sums of money in order to comply with the Sarbanes Oxley Act. This extra cost is a direct result of some high profile unethical corporate abuses by a few corporations over a decade ago. All publicly-owned companies suffer for the prior sins of a few defective organizations and their leaders. This suffering is a lot more than meets the eye, because organizations outside the USA are not saddled with a Sarbanes Oxley Act, and have a competitive cost advantage.

You can see the same pattern in organizations. The boss notices that an individual is leaving work early a couple times a week, so he issues a reminder of hours of work for the whole organization. This leads one cynical employee to blow a bugle at quitting time to let people know when it is time to go home.

It is natural to want to fix the problem when trust has been broken, but we need to ask what price we pay when so many aspects of daily life are regimented and people are forced to pay for the mistakes of others. Does it make people want to be less accountable for their own actions? Does it demotivate them by stifling creative instincts? Does it discourage them from taking risks? Is it fair?

I think of what the world would be like if we did not have a tendency to punish the many for the sins of a few. What would happen if we encouraged personal responsibility and building trust and transparency by reinforcing candor. It would be a different place for sure. When you ask your children who broke the lamp in the other room, one of them would say, “I did, Mommy, and I am sorry.” It would be a kinder, gentler world with far fewer dumb rules we have to follow because a few unscrupulous people cannot be trusted to do the right things.