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Why leaders need a long-term view

In boardroom discussions, the focus should be on how strategies today can help predict behaviors tomorrow.

When a business is going well, I’ve seen leadership teams conform to an unwritten 80-20 rule of thumb: They spend about 80 percent of their time focused on growth for the long term and only 20 percent managing the short term. But when things are not going well, I’ve observed the opposite: The temptation is to focus almost exclusively on the short term, with leaders spending a mere fraction of their time looking ahead.

An ultra-short-term focus, however, is not sustainable. As pressing as today’s demands are, as businesses continue to struggle with impact of COVID-19 and economic uncertainty, leaders should strive for balance between the short term and long term to produce value that benefits all stakeholders.

Admittedly, maintaining a long-term view has been challenging for business leaders who, over the course of the last year, were confronted by a pandemic and an economic crisis. In the early days of the pandemic, I witnessed the short term becoming the center of attention for leaders of companies where I am a board member, as well as at other firms. It’s a natural reaction during turbulent times when so much is changing day to day.

Consider dental supply companies, whose sales in the U.S. were cut by 50 percent or more in the second quarter of 2020 as dental offices closed and the provision of oral care plummeted. Similarly, as travel came to a virtual halt, the hospitality industry suffered. Accor, a global hospitality group with more than 5,000 properties and 10,000 food and beverage venues in 110 countries, reported a precipitous drop in its revenues — down 88.2 percent in the second quarter of 2020 on a “like-for-like” basis, and off 62.8 percent in the third quarter. Though business prospects have since improved across all industries, nearly half of the financial executives surveyed by PwC last summer said they expected revenues to decline by more than 10 percent in 2020.

At the other end of the spectrum, there has been dramatic growth in areas such as telehealth, which was projected to see a 65 percent increase in demand in 2020 alone. Even this positive scenario can cause management to concentrate almost exclusively on short-term opportunities to capture market share rather than on anticipating future customer requirements.

Absent a long-term view, leaders may inadvertently shortchange future prospects and value creation.

Generating value

In good times and in challenging ones, business leaders need to allocate capital and people for the benefit of all major stakeholders — employees, customers, shareholders, and society in general. As my colleagues and I wrote in a recent article in the Journal of Applied Corporate Finance, leaders have a responsibility to produce “sustainable increases in long-run value, and then help the stock market reflect, or prospective buyers recognize, that value.” A key practice in establishing long-term value creation is to use the net present value (NPV) test. In financial terms, an investment passes the NPV test when the discounted present value of its projected cash flows over time is greater than the cost of producing those cash flows.

Absent a long-term view, leaders may inadvertently shortchange future prospects and value creation.

What sounds straightforward becomes far more difficult if management is not investing enough of its energy and focus on the long term. Of course, any crisis and its impact must be managed in the short term — for example, controlling costs, avoiding supply chain disruptions, and rightsizing the workforce. Value creation, however, requires a longer-term view.

What leaders can do

In a world of uncertainty, company leaders and boards of directors need to keep perspective by balancing the short and long term. Here are some suggestions.

Focus on the known. Management and boards need to focus on what is known. For example, the pandemic is not going to last forever, nor will it be over within a few weeks. The latest projections from the World Health Organization are that COVID-19 vaccines will likely not be widely available until mid-2021 in developed economies, and it will be 2022 before the rest of the world gets vaccinated. Based on these projections, how would a company’s business be affected in the next three to four months, six to 12 months, or one to two years? By running various scenarios, management can decide on the best responses to both crisis and opportunity, which is especially helpful in capturing a stronger competitive advantage as the pandemic subsides and the next business conditions emerge.

Rightsize human capital. One reason a company grows faster than its competitors is that it has the best people and a low turnover rate. Amid a crisis, however, focusing almost exclusively on the short term may lead to decisions to lay off massive numbers of people without considering the cost of finding the right talent in the future or the implications of the best people being hired by competitors. Though layoffs and furloughs are often unavoidable during severe downturns, cutting costs in other areas such as office space and travel can help maintain the workforce so that mission-critical staff are not lost.

Keep a balanced perspective. As business resumes and evolves, companies can get back on track with a balanced perspective — which can be gained by extrapolating lessons learned in the short term for the long term. Airbnb, for example, saw an opportunity to switch its strategy, redesigning its website and its algorithm to show prospective travelers accommodations that were closer to home, so people could vacation without flying. Wayfair, the Boston-based e-commerce retailer of furniture and home goods, saw the crisis-accelerated trend toward more online purchasing as an opportunity. Restaurants also bore the brunt of the COVID-19 fallout and resulting changes in consumer behavior. Those that stayed afloat pivoted quickly, in some instances by offering curbside pickup and delivery. Now, leaders in the restaurant industry are looking forward and projecting behavior among post-pandemic consumers who will likely have high expectations for cleanliness and sanitation for on-site dining, while continuing to rely on drive-through, curbside pickup, delivery options, and touchless kiosks and ordering systems.

Although the future seems uncertain, that doesn’t mean business leaders cannot plan for it. Leaders can focus on the major areas that impact shareholder value: growth, profitability, capital requirements, and cash flow. Focusing on value creation for the long term will help companies weather the current storm and emerge even stronger.

Author Profile:

  • Harry Kraemer is professor of leadership at Northwestern University’s Kellogg School of Management and a best-selling author of books on values-based leadership. An executive partner of one of the largest private equity firms in the U.S., he is an executive consultant and serves as a board member for numerous private and public companies.
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