“Managers and investors alike too often fixate on short-term performance metrics, particularly earnings per share, rather than on the creation of value over the long term.”
— McKinsey
As CEO, if you’re not telling a long game of value creation, you may be selling yourself — and your business — short.
Companies that prioritize short-term gains over long-term value actually have it backwards, because to sustain a profitable long-term business, your company must be committed to all stakeholders over time. Businesses are beholden to customers, employees, suppliers and communities, not just stockholders, to drive value. Your company’s value story must include profits, yes, and so much more.
Short-term thinking is nothing new of course, but it is a problem far and wide. “Managers and investors alike too often fixate on short-term performance metrics, particularly earnings per share, rather than on the creation of value over the long term,” according to the McKinsey report The Value of Value Creation. “Companies that conflate short-termism with value creation often put both shareholder value and stakeholder interests at risk.”
The effects of short-term thinking can be detrimental. Take for example the Global Financial Crisis of 2007–2009, which destroyed billions of dollars in shareholder value when banks put short-term profits before everything else. Rather than create long-term value for their stakeholders, decision-makers in banking severely damaged their industry’s reputation — the effects of which lingered for quite a while. (Some would argue that, even now, their reputation still hasn’t fully recovered.) In the long run, undermining the interest of both shareholders and stakeholders did not pay off for banking. And the industry’s value story has been badly damaged.
This article originally appeared in CEO Communicator, the digital magazine for executives who aspire to achieve excellence in communications.
Value creation is about much more than profit. The goal should be to increase your company’s value to all its stakeholders, both now and in the future. In a study of 335 companies from Germany, the Netherlands, the United Kingdom and the United States, KPMG identified common patterns among long-term oriented businesses; namely, a focus on long-term value creates superior and more stable financial performance.
The numbers don’t lie. Consider these facts from the study:
- When observing revenue growth over a 15-year period, long-term oriented companies showed 130% growth, while short-term focused companies had 77% growth.
- The average annual revenue growth for long-term oriented companies was 6.1% compared to 4.2% for other companies.
- Earnings wise, long-term oriented businesses showed growth of 212%, compared to just 92% for short-term focused companies.
Don’t get distracted by the smoke-and-mirrors of short-term gains when creating and sharing your value story. Be inclusive of all stakeholders — customers, employees, suppliers and communities — not just stockholders. Speak to each audience about all sources of your company’s value creation — profitability gains, community building, environmental strides — and tell a value creation story that identifies outsized profit as an output, rather than the cause, of strong business performance. This will ensure you will play the long game while increasing profits.
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