A McKinsey article on Finance (2015) quotes:
As a result of their focus on short-term EPS, major companies often pass up value-creating opportunities. In a survey of 400 CFOs, two Duke University professors found that fully 80 percent of the CFOs said they would reduce discretionary spending on potentially value-creating activities such as marketing and R&D in order to meet their short-term earnings targets. In addition, 39 percent said they would give discounts to customers to make purchases this quarter, rather than next, in order to hit quarterly EPS targets. Such biases shortchange all stakeholders.
I have yet to meet a client at any level, including Cx level, who says to me that managing by/the sort-term numbers is the way to lead an organization well. Yet, the same people acknowledge that this is pretty much the kind of reality that Boards and governance bodies request and force them to do. They are truly ‘Prisoners of the Numbers’ [1] to use a title of a 13 year old article of mine. Nothing has changed much.
In my early days working in the pharmaceutical industry, coming from clinical practice as a psychiatrist, I used to visit the headquarters of the company, and in particular its executive floor. I soon noticed a strange ritual. People came out form their closed offices from time to time and walked around stopping in the corridor by a screen on the wall. The screen contained lots of numbers in many colours. The numbers seemed to change.
I thought at the beginning that it was a peculiar ritual. In my extreme corporate naivety of those days, it took me a while to understand that these people were looking at the stock market numbers and, in particular, the value of the shares of the company. In those days there was a collective screen or terminal for this, probably only in the executive floor. These days, of course, you can get this on your smartphone.
That sort of executive pilgrimage to the niche of Saint Market drove me nuts. In the way to the toilet, those C level people would stop by the screen. And going to the elevator (even if there was shortcut ) or greeting people coming to a meeting, before getting into the meeting room. ‘That number’, up and down in the screen, was ‘the company’. I thought there was something very sad about it, but eventually I did not think about it anymore.
Most people would agree it makes little sense to ‘manage by the numbers’ (if not ‘manage the numbers’ or ‘being managed by numbers’) but the practice is ubiquitous. The measurement, index, proxy, indicator, traffic light, marker, has taken over. ‘The lunatic (numbers) run the asylum?’
There is plenty of data suggesting that focusing on the long term delivers more value, but we run two parallel conversations: the official one of ‘the quarters’ and ‘earnings’, and the corridor one of ‘this is crazy, we are making decisions based not upon strategy but short term results and sexy numbers’.
As usual, many may think that this is a caricature and simplification. To those, please read again the quote from the article.
I am even tempted to say, there is nothing intrinsically wrong with that. If this is what you want, so be it. But be honest about how the company is led. The moral judgment is not about the practice but about the possible disingenuity of the official rhetoric that pretends differently. One thing can be said about those 400 CFOs; disingenuous, they were not.