Picture yourself as the general manager of an NHL team. You want to make the playoffs, so rather than recruiting young talent to build a winning team for the long term, you blow the budget on free agents. You may not still be leading the team by the time the rookies become contenders, so you might as well take a shot at the Stanley Cup now.
Translate this to the corporate setting and you’ve got the “short-termism” problem in a nutshell. Seeking to appease investors with boosts to share prices, CEOs are prioritizing short-term returns at the expense of R&D, workforce training and other investments essential to their companies’ long-term growth. Given dwindling CEO tenures—averaging as little as three years in some industries—chief executives can be understandably reluctant to make long-term investments, knowing the benefits won’t materialize until their successor’s successor’s time. So it’s the job of the board to secure the company’s future by focusing on more distant horizons.
But boards aren’t doing that. When consultancy McKinsey & Co. surveyed C-level executives on the sources of pressure for producing short-term results, almost half named the board of directors as the number one culprit. And while boards are the ultimate stewards of corporate strategy, only 21% of directors said they have a complete understanding of their company’s game plan.
“Boards spend an extraordinary amount of time looking in the rear-view mirror,” says Mark Wiseman, CEO of the Canadian Pension Plan Investment Board and a vocal critic of director myopia. The vast majority of director time is spent studying financial results, seeing how the company performed in the previous quarter or year. “Boards need to spend a bigger proportion of time looking forward to where global forces are moving their markets,” says Wiseman.
If the board’s top job is promoting the company’s long-term well-being, it must focus on tracking the quality of the talent pool, the rate of innovation, the trust in the community and other metrics of corporate health. In essence, boards need to adopt the perspective of owners who worry about not only today’s shareholders but also future generations. Shareholder returns at family-controlled corporations significantly outperform those of widely held public companies, even though family-controlled boards tend to break governance rules, such as having a certain number of independent directors. “It’s baked into their DNA to be focused on the long term, as their focus is to maintain the family business and wealth,” says Matt Fullbrook, manager of the Clarkson Centre for Business Ethics and Board Effectiveness (CCBE) at the University of Toronto, which has been studying the underlying reasons for the curious strength of family firms.
Institutional investors and other long-term shareholders can help fill the role traditionally played by a company’s founder by expanding their involvement beyond say-on-pay votes. To encourage boards to understand their companies’ long-term needs, Wiseman also argues that directors should be paid more and their compensation linked to company performance beyond their term on the board.
Both CN Rail and CP Rail are among the first Canadian companies to introduce requirements that directors hold their shares after retirement. Johnson & Johnson has established minimum ownership guidelines for directors, and some businesses even require directors to invest their own money when they join the board. In essence, these companies don’t want directors to think like hired-gun GMs—but like team owners looking to build a championship legacy.
MORE IN OUR SERIES ON BUILDING BETTER BOARDS:
- How to make corporate boards more diverse
- How corporate boards can set executive pay more fairly
- How to make corporate boards savvier about technology