Short-term thinking is stifling growth for many businesses. They need to return to a builder mentality.
To maximize shareholder value, executives need to focus less on maximizing shareholder value. It’s that paradox that led Dan Adams, founder and president of the AIM Institute to write “Business Builders: How to Become an Admired & Trusted Corporate Leader.” With so much emphasis placed on quarterly earnings reports, leaders lose sight of long-term growth and goals, things that really build the foundation of a healthy and thriving enterprise that’s self-sustainable. To counter this, they – and the boards that hire them – need to rethink their strategies and focus on leaving a stronger company than they inherited.
“When you got that promotion, you were not handed a laurel wreath,” Adams says, “You were handed a trowel.”
The trouble with putting so much attention on quarterly earnings reports is you’re looking back at the previous three months instead of looking ahead to the long term. Developing a new product or service that delivers value to customers – and thus makes for a more valuable company – can take years, and it can cost money upfront. Those are not things that necessarily jibe well with a good quarterly report, but they make a huge difference over time. That’s not to say those quarterly reports don’t matter, but there’s nothing leaders can do to change the past.
“You can’t ignore that, but you have to decide where your primary focus is,” Adams told BOSS.
“You know, if you’re in target practice with a bow and arrow or a rifle or something, you can’t have two different targets, right? You have to pick your main target.”
It turns out, AIM Institute research shows, that organizations with a focus on the short term actually grow more slowly than those with a longer-term focus. They’ll make moves such as hiring freezes, eliminating travel budgets, or even layoffs that cut costs but limit potential.
The first order effects are that those cuts buy a few good quarterly reports, but the second order effects are that they inhibit real growth.
“It’s almost always true that your second order effects are in the opposite direction and amplify your first order effects,” Adams said. “So in other words, if I just really enjoy eating a lot of jelly donuts, there’s going to come a time where my second order effects are I can’t get in my clothes anymore, right? If, on the other hand, I exercise and take really good care of myself, the second order effects are I’m going to be able to play with my grandkids and go canoeing and do all kinds of fun stuff.”
Back to Building
Nearly 40% of executives at publicly traded companies state that their No. 1 goal is to maximize shareholder wealth. With that target, they’re almost always going to focus on the short term, at the expense of the long term. If you really want to maximize that wealth, you need to set a different goal, one that has wealth maximization as a byproduct. That goal should be to drive organic growth by delivering differentiated value to customers.
“That may seem narrow, but that’s exactly what the founder of every company did,” Adams said. “They drove organic growth by figuring out what their customers wanted and doing something that others were not doing.”
The AIM Institute sorts leadership mentalities into four categories: builders, decorators, remodelers, and realtors. Builders deliver customer value, just like the founders did. Decorators focus on looking good quarter to quarter, but it’s mostly superficial. Remodelers are skilled at fixing problems, but they rarely deliver anything new. Realtors focus on mergers and acquisitions but don’t really grow what they acquire.
Investor relations, problem-solving, and M&A all have their places, but organizations need builders at the top.
Over half of the executives Adam surveyed see themselves as leaders, but only a third of their subordinates view them that way. What happens when decorators rise to the top levels of a firm is they start trimming away at the long-term costs while riding a wave of success that a builder predecessor created. That’s enough to get them a few years of platitudes, and by the time things head south, they’ve moved on to a different position or a different company.
“In actuality what I’ve done (as a decorator) is short-changed the future of the company one division at a time, and my company is rewarding me for doing this.”
Passing the Baton
Boards of directors need to put builders with the objective of leaving the business stronger than they found it. That should be the No. 1 mandate and duty for leaders. Boards need to “pinch themselves and say, ‘Hey, what are we doing here?’”
“That’s what we want to change the thinking on,” Adams said. “I’ve had the pleasure of working with many, many companies and many, many leaders, and I can tell you that a lot of them are not being led by builders. There are some, and it’s a delight to work with them, but there’s still a lot of decorators out there and our research supports this.”
Boards should engage in a thought exercise when appointing CEOs to imagine the speech they would give at their retirement. Are they going to focus only on their time in charge, or are they going to say, “We are positioned for the future. Here are the things we have put in place.”
Boards should choose the leader who sees their own retirement as passing the baton, not as the finish line.
Are you a business builder?
Visit https://areyouabusinessbuilder.com/ to take a 20-question self-assessment from the AIM Institute that includes a free report with ideas on where you might change your leadership philosophy.