An Interview with David Langstaff and Kate Isaacs
Higher Ambition CEOs wrestle with a dual imperative: deliver results in the short-term, and build capacity to create long-term value. Successfully navigating this path is not easy, especially for leaders who feel pressure to meet short-term investor expectations. Frustration with “short-termism is not new. Unfortunately, like the weather, there is a lot more focus on complaining about the problem, than with identifying practical strategies to address the issue. David Langstaff, executive fellow at the Center for Higher Ambition Leadership, and Kate Isaacs, academic fellow at the Center, are aiming to change that. The have recently launched a CHL research project to better understand how some companies are able to effectively manage the short-term/long-term tension. We recently sat down with them to learn more.
Center for Higher Ambition Leadership (CHAL): Give us the 30,000 foot view of the short-term/long-term project and what you hope to accomplish.
David Langstaff (DL): We are hoping to reframe the conversation from one where short-term and long-term are
seen in opposition – one bad and the other good – to an “and’ construction. If executives don’t focus on the short-term, they get fired. If they focus excessively on the short -term, they ultimately get fired. It is a real balancing act.
One challenge is that the system pressures are all based on short-term financial metrics. Another is that “long-term” itself is not well-defined, much less the metrics for measuring long-term performance.
What we want to do is look at exemplary companies and how they have done it. We want to drill down into the key thinking and practices of these companies that really exemplify what the Center for Higher Ambition is all about. We’ve found a great willingness to engage on this—and, frankly, some great lessons learned.
Kate Isaacs (KI): CEOs and investors are engaged in the short-term/long-term discussion, but too often from a point of disempowerment. They bemoan a system that puts too much short-term pressure on them, but feel resigned to living with it. What we believe – and what we are beginning to find – is that executives and boards can take concrete action to define the terms of this conversation, without waiting for someone to “fix” the larger financial system.
Polarity is a key concept in our research—two seemingly opposites that are in tension with one other. Too much of one or the other creates problems. The art of leadership is finding the right balance. It’s not either short-term or long-term, it’s both. Companies have to deliver short-term results and they have to invest in the capability to create long-term value or they will erode their future. The key is that delivering in the short-term should strengthen, not deplete, long-term performance potential.
CHL: What are some examples of companies that are doing this well?
DL: Two that come to mind are Henry Schein and Aetna [note: both are members of the Center]. In both cases, these companies have a strong sense of purpose. They want to thrive over the long term. They want to be ready to compete in 10, 20, or 30 years. It really takes us back to the idea of the CEO who understood their role as one of steward of an enterprise of value to society, and therefore has a broader purpose to contribute to a better society. It’s really back to the future – a singular focus on maximizing profit for shareholders is fairly new. Stan Bergman (at Henry Schein) and Mark Bertolini (at Aetna) both seem to get this, as do their boards. Henry Schein has a record of doing this over two decades. Not coincidentally, they have had the same chief executive over that time.
KI: Of course it is easy to do this when times are good. Profits rolling in buys a lot of patience. When times are not so good, your purpose and values are tested. We are especially interested in companies that have managed the short-term/long-term tension in tough times. Your guiding purpose and deep essence as a company are what you have to return to in order to climb back up. The Ford turnaround is a good example. Alan Mulally believed in the potential of Ford, and he was clear about the short-term hits that the company had to take on the road towards long-term health. That takes real leadership maturity—knowing it’s going to take time to turn a company around, and communicating the right short-term expectations to investors, employees, and customers while you guide them through the difficult narrows.
Another good example is W.L. Gore, best known as the maker of Gore-Tex fabric. Back in 1978, they found a major problem with the fabric. They immediately recalled millions of dollars’ worth of Gore-Tex fabric. This sent an unequivocal message to employees, customers, and investors that the company was serious when it said it would stand behind the quality of its products. Their values trumped short-term financial worries, and that built tremendous trust with Gore’s stakeholders. In the long-term this decision drove a wave of product innovation that ensured the company’s place as a technology leader in the decades that followed.
DL: Generating short-term profits as the cost of trust with your key stakeholders is never a smart long-term bet.
CHL: Who is going to drive this conversation to catalyze the change you envision?
DL: It is going to take a little of everybody: academics, boards, executives, and investors. All parties need to engage, though it is the CEOs who must start the conversation. It is the executive who sets the vision for the company. He or she has to develop the metrics by which progress toward that vision will be measured. Those that define success solely as financial performance during their tenure are violating their fiduciary responsibility to society. The board needs to make room for these activities to happen. They have to be on the same page. It is true with investors, too. Cull your shareholders to get the ones you want. The CEO has to take charge of that conversation and not just say what they think the analysts want to hear.
KI: The challenge, of course, is standardizing metrics for things like employee engagement and culture so that they can be reported. There is no commonly understood measure for culture that is the equivalent of EBITA (earnings before interest, taxes, and administrative costs) in finance. We hope this project will highlight some of the creative ways that companies are using non-financial metrics to drive value creation in their organizations.
DL: I see all of the tools of running a business as interconnected. You set a long-term mission which should inform a strategy, the operational plans to execute the strategy, and the organizational design to be able to carry out the operations. You have to see how each fits into the whole. And you have to consider context. Is it a turnaround? Steady state? Dark clouds on the horizon as Jack Welch saw when he took over at GE. When you use the tools to help explain why the company does what it does, you unlock human potential.
Kate’s right (about metrics) although I don’t think we’ll see an EBITA that applies to all companies. Each company has to do this on their own. This is where our study can help by creating the space to have this conversation.
KI: What becomes interesting is the dialogue with your stakeholders about what a purpose-based Higher Ambition vision and strategy looks like in practice. That will then help define useful metrics. Rebecca Henderson at the Harvard Business School says the basic moral code for companies has traditionally been “don’t lie, don’t cheat, don’t steal.” But beyond that then what is there? Aetna is bringing in “caring” as a guiding value. How do you practice caring with your various stakeholders? How do you measure it? How do you value it? That is a fascinating conversation to have.
DL: That’s the conversation that we want to stimulate. Doing something important is what motivates people. That’s why the other piece of this is purposeful metrics. There is a lot of talk about purpose and values but few understand why it matters. We are trying to show why it does. Purposeful metrics can help make this more visible and meaningful.
CHL: So what’s next? How will the project move forward?
DL: A few institutions are supporting us and we are always looking for more to get involved. We are interviewing executives, board members, and investors to get a well-rounded view of the terrain. We want to know from each of these not only what’s working and what’s not, but also what would be helpful to them. We are staying in touch with McKinsey, the Aspen Institute’s Business and Society program, and others exploring facets of this challenge. We plan to report our progress at the Center’s annual CEO Conference in January 2016.
CHL: And people can reach you through email@example.com
ABOUT RESEARCH INITIATIVES AT THE CENTER FOR HIGHER AMBITION LEADERSHIP
The Center’s research agenda encompasses numerous initiatives to better understand how companies can create both superior social and financial value. Research is supported by participating companies and undertaken by highly regarded academics and executives. The emphasis is on uncovering cutting-edge practice insights that companies can use to catalyze their Higher Ambition journeys. To learn more, contact us at firstname.lastname@example.org