Written by: Jean Gomes, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
A binary mindset unconsciously encourages leaders, teams, and organisations to repeat a ‘ignore, panic, react, justify’ loop, making short-termism seemingly the only option.
A study of over 600 US companies’ investment, growth, and earnings management from 2001 to 2015 ¹ identified those with a long-term focus cumulatively grew on average 47 percent more than the revenue of other firms and with less volatility.
For decades, research has shown that companies pursuing long-term strategies outperform those that don’t. Whilst there are numerous reasons for a short-termism bias, including ineffective incentives, weak strategic thinking, and tactical leaders, we often see otherwise smart leadership teams caught in a loop of thinking and behaviour that plays out until they are eventually replaced. This loop cultivates either/or thinking deep into the culture of an organisation. It’s either ‘deliver immediate results and survive’ or ‘indulge in high-risk innovation that will see us lose our jobs’.
In a Strategy & global survey, ² 700 business executives were asked to rate their company’s top leaders in terms of their skill at strategy creation and at execution. Only 8% were credited as being very effective at both.
‘Ignore’
This loop starts with ‘Ignore’, largely disregarding what’s happening outside and selectively tuning into data that reinforces a fundamental ‘baseline’ assumption ‒ that what was valuable yesterday will be valuable tomorrow…plus 10%. In other words, maintaining the status quo is the strategy for many organisations. Innovation and growth efforts may be happening, but they are far from being the primary focus of the leadership team. And because they don’t have any skin in the game, these efforts constantly fail to deliver breakthroughs. As an organisation grows, it loses its focus on the outside world, as its operations consume more leadership attention than customers, nascent competitors, and new opportunities. It relies on an increasingly narrow relationship with the world through sales and support channels that reduce and dampen down information that might cause it to question the baseline assumption.
A study ³ by economists, John Graham, Campbell Harvey and Shiva Rajgopal of over 400 CFOs, found that almost 80% knowingly forewent economic value (positive net present value projects) to meet short-term earnings benchmarks due to peer pressure from competitors and investors’ expectations.
‘Panic’
The ‘panic’ stage takes hold when new realities threatening the organisation’s relevance are impossible to avoid. This creates an existential threat that feels impossible for the leaders to face. Deep down, they know they’ve avoided the signals and choices that have brought them to this potential crisis, but it’s too late.
‘React’
So, leaders ‘react’ in the only way they know how – push the existing system harder to perform, cut costs, and convince stakeholders that acquisitions will buy their way out of the problem. Here, from a state of panic, options seem incredibly limited and binary thinking and decision making prevails – ‘option a is good, b is bad’. Nuance is nowhere to be seen.
'Justify’
The ‘justify’ stage is about creating arguments about why these decisions were the only course open to them. Because they are smart people, these arguments are extremely well articulated and convincing, but ultimately, they are an act of self-deception. The possibility that the crisis could trigger a deep revaluation and sow the seeds of transformation is too painful, so the cycle continues unchecked.
So, what’s the answer to breaking this loop? It starts with a profound re-evaluation of the focus and responsibility of leaders to balance the interests of performance and growth.
In an analysis ⁴ of Europe’s largest 1000 companies, the firms whose CEOs had the longest tenure had the highest long-term performance.
The most fundamental duty of leaders can be summed up in the Value Trilemma, a model I created 20 years ago to describe a perennial challenge facing every leadership team I’d ever worked with. In an environment of rising uncertainty, it’s an essential mental model that should inform organisational strategy and leaders' focus.
Leaders must deliver value today, exploiting their organisation’s current opportunity. They also need to create value for tomorrow; new insight, ideas, innovation, partnerships, and change efforts. In a more uncertain world, they need a compelling purpose, a sense of why the organisation will remain relevant in the future that’s more than robustly defending value today. This purpose must be compelling enough to attract future talent and give stakeholders the confidence to invest in their future. And leaders must align people and value.
Each of these value creation domains needs different mindset approaches. Attempting to produce value tomorrow with the execution mindset of value today will achieve only variants of the present and demonise innovation efforts as indulgent and over-risky.
The ability to stand back and see the relationship between the value domains is essential for the leader who wants to ensure their organisation's long-term viability is maintained by the over-focus on the immediate.
Organisations embracing short- and long-term performance is described as organisation health by Mckinsey Partner, Brook Weddle. ⁵ In their extensive research into the success factors of transformation they acknowledge that mindset is perhaps the most important factor. ‘The companies that did no work on diagnosing mindsets never rated their change programmes as ‘extremely successful,’ whereas companies that took the time to identify deep-seated mindsets were four times more likely to rate their change programmes as successful’. ⁶
In my new book, Leading in a Non-Linear World, I explore how to build mindsets that can help leaders and teams face a more uncertain world and avoid the traps of either/or thinking that limit their future.
Follow me on LinkedIn, listen to our podcast, The Evolving Leader, and visit my website for more info.
Jean Gomes, Executive Contributor Brainz Magazine
Jean Gomes is a New York Times bestselling author and trusted advisor to CEOs and leaders. His research and practice centres on creating More Human organisations, harnessing the latest findings in neuroscience and experimental psychology. In his most recent book, Leading in a Non-Linear world, he explores a new approach to embracing uncertainty by building mindsets for the future. The team at his research-based consultancy, Outside, works with a community of scientists to develop simple and powerful strategies to transform wellbeing, leadership, and organisational agility. He is co-host of the popular podcast, The Evolving Leader.
References:
[i] Barton, D., Manyika, a., Koller, T., Palter, R., Godsall, J. and Zoffer, J., 2017. Where Companies with a Long-Term View Outperform Their Peers. [online] McKinsey & Company. Available at: <https://www.mckinsey.com/featured-insights/long-term-capitalism/where-companies-with-a-long-term-view-outperform-their-peers#> [ii] Leinwand, P., Mainardi, C. and Kleiner, A., 2015. Only 8% Of Leaders Are Good At Both Strategy And Execution. [online] Harvard Business Review. Available at: <https://hbr.org/2015/12/only-8-of-leaders-are-good-at-both-strategy-and-execution> [Accessed 5 July 2020].
[iii] John Graham, Campbell Harvey and Shiva Rajgopal. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics 40, nos. 1–3 (2005): 3–73. [iv] Olesiński, Bartosz & Rozkrut, Marek & Torój, Andrzej. (2016). Measuring the consequences of short-termism in business – the econometric evidence for a sample of European companies. 63-78.
[v] https://www.mckinsey.com/business-functions/organization/our-insights/what-makes-an-organization-health
[vi] Keller, S. and Schaninger, B., n.d. Beyond Performance 2.0, 2Nd Edition.
