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.