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Business leadership in society

What does managing for the long-term mean?

By April 12, 2021April 19th, 2021No Comments

(This blog was originally published as part of the FT Moral Money Forum’s report, “The long-term view in a short-term world,” co-sponsored by High Meadows Institute. The full report can be read here.)

Critics claim that today’s companies and financial markets are severely out of balance and are focused on short-term quarterly results and raising their stock price via share buybacks rather than investing for long-term success.

A quick scan will generate plenty of examples to confirm that point, for example Kraft Heinz, but is this the reality? Steve Rattner, in a 2018 article in The New York Times headlined “The Myth of Corporate America’s Short-Term Thinking,” noted that business investment has remained between 11 percent and 15 percent of gross domestic product since 1970. At the same time, corporate spending on research and development, an undertaking with a long payback, is now at its highest as a percentage of gross domestic product.

So what does managing for the long-term require if, for most companies, investment in R&D is sufficient? On examination, it is fundamentally about defining business’s role in society. Attitudes have turned 180 degrees from the 1970 Friedman doctrine, which held that a business’s only social responsibility is to maximize returns to shareholders.

Long-termism for investors means focusing on social impact as well as financial performance. Long-termism involves managing a company’s effect on all its stakeholders, articulating its purpose and working to address systemic issues such as climate change and inequality, which affect the health of the society on which its success depends.

In his 2018 letter to CEOs, Larry Fink, of BlackRock, summed up this challenge: “We…see many governments failing to prepare for the future…As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges…Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance…but also show how they benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”

Does the public support this new role for business? Yes they do. A 2021 Edelman survey of 33,000 people in 28 countries found that 61 percent trust businesses more than government, and business is also the only institution viewed as both ethical and competent. Sixty-eight percent of respondents say CEOs should step in when the government does not fix social problems, and 65 percent believe CEOs should be accountable to the public, not just to the board or stockholders.

As we see in the articles in this report, when companies take up this challenge and increase their social performance, focusing on material issues, they will increase their financial performance. Managing for the long-term will ultimately require business to take the lead in transforming business models to support a regenerative and sustainable economic system.

Of course, this is a bold challenge beyond the reach of many but we can see the beginnings of significant commitment. Doug McMillon, chair of the Business Roundtable and CEO of Walmart, the largest retailer in the US, last year committed Walmart to becoming a regenerative company.

He said: “The work ahead requires learning and commitment from each of us. We have created an astonishing moment of truth. The crises we face are not a science problem, they are a human problem. Technologies are important but the ultimate power to change the world does not reside in them alone. It relies first and foremost on reverence, respect and compassion— for us, all people and the natural environment that sustains us all. This is regeneration. And this is what I commit Walmart to.”