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The pressure put on CEOs to deliver quarterly results is greater than ever before. A 2014 global survey of more than 600 C-suite executives and directors, conducted by the non-profit Focusing Capital for the Long Term (FCLT), reported that two-thirds of those surveyed said pressure for short-term results had increased over the previous five years. And short-term thinking since that survey has not abated. In early April, Mark Zuckerberg testified before an angry Congress about Facebook’s customer data leaks, answering questions about placing short-term profits above protecting our personal information. The pharmaceutical company Valeant raised the price of Cuprimine — invented in 1956 and used to treat Wilson’s disease, a rare condition in which the body cannot process copper — from about $500 to about $24,000 for a 30-day supply, causing outrage from consumers. Wells Fargo bank is under scrutiny from regulators for creating false client accounts to boost short-term profits.

Many CEOs argue that they have no choice but to cave to the demands of activists and others on Wall Street to boost profits quarter after quarter. But it doesn’t have to be that way. That same FCLT study also found that nearly two-thirds of those CEOs said the pressure to deliver strong short-term financial performance stemmed from their own board and their own executive team. In other words, some of the short-term thinking we’re seeing is actually self-imposed, with CEOs simply getting in their own way. What makes the plague of short-term thinking somewhat puzzling is that, according to McKinsey estimates, 75% of the U.S. market is held by buy-and-hold investors who are actually interested in the long-term value of the companies in which they’ve invested. Given this, you could argue that CEOs shouldn’t be putting so much pressure on themselves to get strong short-term results.

The trouble with short-term thinking is that in many cases, it doesn’t reward shareholders in the long term. The McKinsey Global Institute examined the performance of 615 large- and mid-cap U.S. publicly listed companies from 2001 to 2015, looking at patterns of investment, growth, earnings quality, and earnings management. This lens allowed McKinsey to separate long-term companies from others, and then compare their relative performance. Among its findings was that the revenue of long-term firms, which spent on average 50% more on R&D, cumulatively grew on average 47% more than that of the other firms, and with less volatility. Cumulatively, the earnings of long-term firms also grew 36% more on average.

The good news is that a small and growing number of forward-thinking CEOs are putting the long-term health of their companies ahead of boosting short-term profits. Consider that in the wake of the Parkland shooting, Walmart and Dick’s Sporting Goods decided not to sell assault rifles. These two businesses will lose revenues, but will gain some customer loyalty for doing the right thing. In the wake of the new tax law, companies such as AT&T and Southwest Airlines said they would pay their employees a $1,000 bonus. While the majority of companies will use their tax savings to buy back stocks and boost dividends, the companies that are sharing the windfall with employees are hoping to boost morale, which can help productivity, and thus shareholder returns over the long term. These executives realized that creating a long-term bond of trust and integrity with your customers and employees sometimes means taking a hit in short-term profits.

For one of the best examples of this kind of thinking, consider the story of CVS Health CEO Larry Merlo, who a few years ago, decided to become the first major pharmacy retailer to stop selling cigarettes — a decision that cost his business $2 billion a year in revenues and a 7% drop in its stock price the day he announced the plan. But Merlo wanted to transform CVS Health into a successful healthcare company, and he needed credibility to do that. Says Merlo, “Our clients started raising the question, ‘How can you be a healthcare company and sell tobacco?’ Pulling cigarettes off the shelf was the right thing to do.” Today, Merlo’s health business is growing rapidly, and his company became financially strong enough to acquire the giant health insurer Aetna.

As DowDuPont CEO Ed Breen puts it: “Focus on long-term value instead of fixating on short-term performance and share price. Make bets that are right for the institution — they should last longer than any CEO.”

Going long is not an easy task, but it can be done. And the stakes are too high not to try.

from HBR.org https://ift.tt/2suGsbb