The Long, The Short and The All

The Long, The Short and The All

Business value creation

The real business of business

 If ‘ifs’ and ‘ands’ were pots and pans, what would you cook up next? A schoolteachers’ old put-down for kids who speculated and questioned was a lesson even though ill applied. It taught us to look for the caveat, the qualification, in each proposition – if you like, the weak point that would destroy the idea completely. A cynical approach but a challenging one.

Marc Goedhard, Tim Koller and David Wessels (‘the Authors’) recently wrote an article called ‘The real business of business’. Their sub-title was ‘Shareholder-oriented capitalism is still the best path to broad economic prosperity, as long as companies focus on the long term.’ As my earlier quote showed, it’s always in the caveat that you find the truth, isn’t it? ‘As long as…’ is such a simple phrase but it makes a lot of assumptions.
The Authors are comparing shareholder-oriented capitalism with stakeholder–oriented capitalism. They come out in favour of the former. But their caveat is that business has to take a long-term view. Most people agree with that. It’s the Achilles heel of commerce today. Faster and faster reports, quicker and quicker judgments and trades by investors. Stock markets little more than casinos run by algorithms. Shareholders mostly behaving like vultures at the economic corpse. It’s enough to make you disoriented and despondent.

The question is how can we modify expectations so that businesses really can take the long view? Will exhortation, appealing to the better nature of shareholders, work? Probably only in a minor way. Something more fundamental is needed, something that affects the pockets of the person who invests and the people who deploy that investment. Their combined demand for instant returns is what drives business people.

“The guiding principle of business value creation is a refreshingly simple construct: companies that grow and earn a return on capital that exceeds their cost of capital create value,” said the Authors. They continue: “…creating shareholder value is not the same as maximizing short-term profits—and companies that confuse the two often put both shareholder value and stakeholder interests at risk.”

The Authors discovered that long-term revenue growth, especially if it is organic, is the real driver of shareholder returns for companies with high returns on capital. Similarly, investment in R&D produced better shareholder growth. I think every business man knows that skimping on R&D and similar costs in order to inflate margins is a fool’s game. Trouble is, a CEO’s tenure is generally short and they’d rather win the accolade now and leave the mess for the next fool to clear up.

Worse, the gambling nature of the shareholder clearly demands all possible efforts to maximise the short-term result. It is this developed greed that is at the root of the problem. I speak here of the big investors, not the local punters, although their attitude is similar. When you complete the ‘risk-appetite’ forms required to allow you to place your savings with a financial fund you assume that some notice is taken of them. I’m sure it is, but not the sort of notice that prevents you asking for an exceptional return or your financial adviser seeking one on which his commission is based.

What are we trying to achieve? A market that reflects the reality of business – including the businesses of today with their rapidly changing technologies – but one that is looking for longer-term, more reliable rewards? To expect steady markets and furiously developing technology to lie down together may be a hope too far. Besides, in any way curbing the advance of technology would be Luddite in a world waiting for all its economic woes to be solved by science.

I can only conclude that we need to re-examine what we think life is all about. Not the life of the aspiring saint but the life of the day-to-day sinner. What makes the demand for ‘now’ so rapacious that we despair of – and renege on – the future? Did our species develop simply to self-destruct for want of appreciating what it is?

Perhaps something to ponder as the last quarter of the year approaches?