Short-termism doesn’t pay off in the long term, and that’s not just an adage. In 2017, Harvard Business Review published convincing data from a 2001-2014 longitudinal study (of course!) of 615 listed companies in USA.
If you ever needed proof that long term is better, you’d surely be interested in the data to defend your stance. For example, what’s interesting is that in 4 critical dimensions of measuring value – revenue, after-tax earnings, business value, and economic profit – the long-termers substantially outperformed the baseline short-termers on aggregate by between 36% and 81%.
In part, proving the case against short-termism is a revolt against the relentless drive for public companies to hit their profit-before-everything earnings targets each quarter year. But for privately-owned small businesses that aren’t compelled to report as frequently, the principle is equally relevant, though obviously for different reasons.
Here are 4 key tips for the small business owner in staying focussed on the long term.
1. It's OK to miss earnings and dividends targets by a little.
2. Invest heavily in assets and IP.
3. Short-term crises seldom need long-term goals to change.
4. Be opportunistic, but don't be a hustler.
First, don’t throw out the baby with the bathwater. Regular reporting to business owners and executive-level management, whether monthly, quarterly or annually, is still vital. It’s just that, to assure governance, you need to shift your reporting priorities to what matters more.
Which leads us to our first tip in how to long-term. To classify each company into either the long-term or short-term group, a metric the researchers used was how often quarterly revenue targets were narrowly missed.
The reasoning is that diverting resources could have easily had them hit their targets. Not diverting resources and, instead, allowing a narrow miss demonstrates the prioritisation of other, usually long-term criteria, over short-term targets.
Building long-term value, by definition, takes a long time. That’s why another key factor the researchers relied on was measuring capital expenditure and investment in research & development. Generally, the more you invest in assets and people, whether R & D, patents and processes and other IP, the more you build the “machine” that creates customer and shareholder value.
But what about crises, like the effects of the 2020 lockdowns? Bear in mind that the study’s review period includes the 2008 global financial crisis. Maybe surprisingly, the research proves again that a long-term approach is better. The long-termers fared only marginally worse around 2008, and by 2014 they collectively outperformed the short-termers by 36% or better.
Responding to an urgent crisis shouldn’t necessarily force a deviation from our long-term goals (even though it might cost a little in the short term).
This is a critical concept for many entrepreneurs. A common trait of most entrepreneurs is opportunism, but the risk of over-flexing the opportunism muscle leads to hustling. It’s precisely the opposite of investing in long-term assets and IP.
As we wrap up this weird year of 2020, how could you apply these 4 tips to ensure your short-term COVID-19 tactics fit with your long-term goals?