Pressure from Wall Street often compels CEOs to focus on the next quarter so that they can meet short-term expectations. But while it is important to meet short-term goals, it is equally – if not more – important to emphasize longer-term objectives. CEOs who adopt long-term strategies eventually help their companies become more profitable, have happier employees and shareholders, and become better corporate citizens, according to a new book titled, Go Long: Why Long-Term Thinking is Your Best Short-Term Strategy. CEOs who go long in their outlook have natural allies among institutional shareholders who not only tend to have dominant voting power but are also long-term investors, the book contends, with supporting evidence from companies such as Ford, Unilever and CVS Health.
“[CEOs] have a natural ally … to build for the long term, serve the communities in which they’re located, and ultimately make for a better world,” notes Wharton management professor Michael Useem, a co-author of the book and director of Wharton’s Center for Leadership and Change Management.
Long-term investors such as big institutional funds and university endowments hold some 75% of all equity, the book says, citing a McKinsey study. “Part of the trick is to find out who those long-term shareholders are in your corporation and go to them, gain their support, express to them a vivid and persuasive long-term vision for your company,” says Brian Dumaine, another co-author, who is founder and editor-in-chief of media firm High Water Press and a contributor to Fortune magazine. The book’s two other co-authors are Dennis Carey, vice-chairman of executive search firm Korn Ferry, and Rodney Zemmel, senior partner at McKinsey & Company.
Useem and Dumaine discussed the book in an interview with Knowledge@Wharton. (Listen to the full podcast using the player at the top of this page.)
An edited transcript of the conversation follows.
Knowledge@Wharton: Mike, how did this book come about, and why did you decide it needed to be written?
Michael Useem: Brian and I and the other two authors have been involved in what we call the CEO Academy, which is an annual gathering in New York for new chief executives or those who are about to take over the corner office. One of the themes that Brian and I and our two co-authors kept hearing is the vital importance of getting beyond the month and the quarter, and how tough that is.
We decided to [share] what we’d learned behind these closed doors through conversations with close to a dozen CEOs about getting beyond the quarter, and how they surmount those barriers. Brian and I and our co-authors want to tell a story here – that you can get beyond the quarter. You can build for the next five years. You can build 10 years out, if you’re good at some of the themes that we develop in the book.
We became convinced that the best way for that argument to be made is by looking at people who have acted beyond the quarter to make a huge difference.
Brian Dumaine: One of the reasons the CEOs at the academy were concerned about managing for the long term is that the pressure for managing for the short term had become so great. We have the activists on Wall Street who want returns now. They prefer – and there are exceptions –stock buy-backs and dividend increases over long-term investments in R&D or in building up a workforce for the 21st century. Any company that wants to thrive over the long term has to make those long-term investments. But as a CEO, you sometimes feel that Wall Street is just breathing down your neck and demanding more short-term, quarterly results.
How do you balance that dilemma? The book is about how some of the most prominent CEOs managed to figure out how to manage for the short term and the long term at the same time.
How to Resist Pressures, Win Support
Knowledge@Wharton: Why is long-term thinking no longer part of the mandate of investors these days? What has brought about the shift?
Dumaine: Part of it is that a small group of investors can control what a CEO does by buying a small percentage of the company’s stock and then putting pressure on the board to enact changes that might not necessarily be in the best interests of the company in the long term.
“As a CEO, you feel that Wall Street is just breathing down your neck and demanding more short-term, quarterly results.” –Brian Dumaine
We cite in the book a McKinsey study that says 75% of all equity is actually held by long-term investors – the big institutional funds and university endowments. But the activists and other short-term investors garner all the headlines. CEOs feel pressured to respond to them in some way because they are, after all, shareholders.
Part of the trick is to find out who those long-term shareholders are in your corporation and go to them, gain their support, express to them a very vivid and persuasive long-term vision for your company. And then when the short-term investors come knocking, you’ll have [the long-term shareholders’] support and their groundcover, and you’ll be able to manage for the long term.
Useem: It’s such a good reminder that capital markets are diverse. And who’s there? There are activists, and there are long-term investors who simply put money into index funds – almost the opposite of activism. Long-term company executives are also interested in long-termism within the boardroom, and have a natural ally in some of the great investment management companies of the world – BlackRock, Fidelity, Vanguard, State Street, etc. – to build for the long term, serve the communities in which they’re located, and ultimately make for a better world. That’s the argument we make.
Unshackling Self-imposed Constraints
Knowledge@Wharton: Is short-term thinking forced upon CEOs by external investors, or is self-imposed by the boards and by the CEOs’ management teams?
Dumaine: We found that a lot of the pressure is self-imposed. The CEOs put it on themselves. Now, it may be that they feel that there’s an activist breathing down their neck. Or they might feel that their boards are focused on quarterly results, and therefore they must manage in accordance to that. But given the point we made earlier about 75% of the equity being long-term equity, the CEO should realize that if they cultivate these investors, then they don’t need to put this kind of pressure on themselves.
Useem: It’s a created world. It’s a created mindset. We inherit our past. We are a product of history, but as we know, we also make our future. This book offers examples of people who have decided they’re going to manage for the next five years out – not [just] the next quarter.
Dumaine: There’s data that shows that going long rewards shareholders in the long term. One of the McKinsey studies we cite in the book shows that companies that manage for the long term grow faster, have higher profitability and create more jobs. So this isn’t just about feel-good management. This has a real bottom-line effect.
Knowledge@Wharton: What sets these CEOs apart from other CEOs who are more vulnerable to short-term pressures in balancing short-term and long-term objectives? You cite Jack Welch in your book saying that managing the two is really the trick of being a great CEO – it’s being able to manage the short term and the long term.
Useem: Jack Welch, the former CEO of General Electric, and many executives who come to our campus or our CEO Academy, always say that as a chief executive responsible for a company or [even] a hospital, you’ve got to get your day’s work done well. You’ve got to get through the quarter extremely well. And you’ve also got to look ahead. You’ve got to be strategic. You’ve got to understand where the market’s going. You’ve really got to get both. They’ve got to have in place a scheme that will allow them to sell products and reach consumers in all kinds of ways five years out, knowing full well that the future is going to be different from what it is now.
Dumaine: The other quality that sets them apart is that they have an ability to sell their long-term vision. They have a very persuasive way of expressing what their long-term vision is. They stick to it. They communicate that with everyone in their organization, and with their investors, so that people feel okay if you miss a quarter or two quarters or three quarters, [but] the business is moving in the right direction over the long term.
Useem: [They are] two sides of the same coin. You’re probably not going to be long in your high office if you don’t have a [long-term] strategy. But equally, you’re probably not going to be there all that long, either, if you can’t advocate the strategy with investors, with equity analysts, with your own employees – and certainly customers.
“Part of the trick is to find out who the long-term shareholders are in your corporation and go to them, gain their support, express to them a very vivid and persuasive long-term vision for your company.” –Brian Dumaine
Lessons from CEOs Who Went Long
Knowledge@Wharton: With that, why don’t we dive into the examples of the CEOs themselves, maybe starting with Alan Mulally at Ford? You say in the book that he was able to bring about a $48-billion turnaround at Ford. How did he balance the short and long term in order to do that?
Dumaine: Alan Mulally’s a great example of long-term investing and forming everything you do in the short term. Alan joined Ford right in the midst of the financial crisis as CEO. He found that the company was on track to lose $17 billion that year. To his surprise, he realized that a lot of the top executives in the firm didn’t even realize that. Alan realized it was a crisis.
Now, the normal thing to do in that situation for a CEO would be just to batten down the hatches, cut costs, hope for the best, and hope that you’d ride out this storm. What Alan did was to set out a long-term strategy first. He called it “profitable growth for all.” His vision was that Ford would be a corporation where everyone would prosper over the long term. Employees would prosper, suppliers would prosper, customers would prosper, and investors would prosper. Alan set this out in a very clear way, and he emphasized it over and over again with his management team. What he and his team realized is that it informs your short-term decision-making.
So for example, at the onset, [Mulally said] Ford should be making the best cars in its class. They should have high quality. They should be environmentally sound. Now, if you’re about to lose $17 billion in a year, how much are you going to think about that? Well, Alan said you’ve got to think about that a lot. All the decisions they had to make for cutting costs or closing down factories were designed to – in the long run – create those great products that Alan wanted for the company. There’s the balance between the long and the short. It wasn’t just blind [cost] cutting.
Useem: If you think about careers of the people reporting to Alan Mulally, in the long term they’re gone. In the short term, if they bring significant problems to the fore, they may be punished for that. No end-of-year bonus, for example – or maybe even worse.
He recognized that the people who work for him had their own incentives, so to speak, to get through the quarter and the year, and not worry about five or 10 years out. Alan found ways of getting people to bring to the fore the underlying short-term issues, but also some of the long-term fundamentals that they had to come to terms with.
Choosing Public Health over Profit
Knowledge@Wharton: You also write about CVS Health’s CEO, Larry Merlo, and his decision to stop selling cigarettes, at the risk of taking a short-term hit to earnings. How does he fit in with your framework?
Useem: This is the best illustration of what the book advocates. Larry Merlo, chief executive of CVS – in a very competitive industry, reached the conclusion that if the company was going to be a provider of health care and health products, there was just something fundamentally wrong with having tobacco right behind the cash register there for patrons to look at as they are checking out.
He consulted extensively within the company, talked with his board at great length. [He worked on] a new strategy to take tobacco out of the stores nationwide. He also talked with senior management. This is not something you can impose by fiat. He had to argue the case with senior people, take their temperature on it, and what he quickly found is that the issues of tobacco are so profoundly antithetical to good health that there was quick agreement from the board, and from senior managers who were going to take a loss.
The company did take a $2 billion hit short-term. [That was a] huge decision, but it more than got that back as the company continued to prosper for other reasons, without tobacco in the stores. It led to the key decision of the last 12 months to begin to merge with Aetna.
Dumaine: Yes, that’s right. One characteristic that this [CVS] story brings to the fore is that CEOs who want to manage for the long term have to have courage. This was a hard decision. CVS’s competitors, like Walgreens, didn’t follow. They kept selling cigarettes. But [Larry Merlo] knew in his heart that if he was going to become a health care company, as well as a retailer, he had to have credibility not only with his employees and his executive team, but with all these companies that CVS wanted to do partnerships with – whether they are health insurance companies or hospitals. CVS was able to create a number of new partnerships after the cigarette decision. It paid off in the long run.
“Larry Merlo, chief executive of CVS, reached the conclusion that if the company was going to be a provider of health care and health products, there was something fundamentally wrong with having tobacco behind the cash register there for patrons to look at as they are checking out.” –Michael Useem
Push for Health and Environment
Knowledge@Wharton: Another CEO whose example I found fascinating was Unilever’s Paul Polman, who fought off a private equity investor to uphold the long-term interests of the company. What can other CEOs learn from him?
Dumaine: Unilever’s Paul Polman realized that setting a long-term strategy can be a powerful tool in motivating your employees and even your customers. Polman had this vision that Unilever should not just be a packaged goods company. He wanted the strategy to be larger than selling ice cream or selling potato chips or whatever.
He saw that this millennial generation believes that business should be more than just the bottom line. Yes, the bottom line is important, but it has to have purpose. It has to have meaning. So, for example, Polman went back to the roots of Unilever, and he found that the founder of the company wanted to make the world a better place. It was during Victorian England, and Sir Lever felt that health was a huge problem in London in those days, and so he came out with Lifebuoy soap. He was trying to improve the hygiene of the British people.
Polman [wanted to] make Unilever … a company that does two things: One, help alleviate world poverty through healthier food and hygiene. [Two], he wanted Unilever to be an environmental steward and eventually become a zero-carbon company. Polman’s argument is that it costs more money in the short-term, but in the long term, it pays off. Unilever has outperformed its peers in the stock market over the last decade or so.
[In January 2018], Polman was attacked by a private equity group that wanted a hostile takeover at 20% premium over stock. This private equity group from Brazil, 3G, saw an opportunity to create a bigger, more efficient company. But Polman saw [in them] a philosophy that was short-term and the exact opposite of his long-term strategy. So he fought back. He got his investors on his side, and he won the public opinion battle in the press. And 3G withdrew its offer.
Securing Buy-in for Longer-term Visions
Knowledge@Wharton: You write about Verizon’s [former chairman] Ivan Seidenberg, as well as 3M’s CEO, Sir George Buckley, and Maggie Wilderotter, who is a director at Hewlett-Packard Enterprise Co. and Costco. What are some of the main lessons from them about balancing short and long term?
Dumaine: When Ivan Seidenberg he took over as CEO of Verizon about 15 years ago, the telecom sector was in chaos. It was a tough business, with too many companies, consolidation, bankruptcies, et cetera, et cetera. Wall Street wanted Ivan to basically buy other telecom companies and merge those, cut costs, pay back the savings in dividends or stock buy-backs, and everybody would be happy.
Ivan had a very different [and] long-term vision for growth. He wanted to build the best fiber optics network and the best wireless network in the country. So at a time when Wall Street wanted him to cut costs, save money, and give it back to investors, he decided to invest $150 billion in building out these new businesses. And he got a lot of pushback.
But one of his secrets was he figured out which investors to cultivate. He found [support from] long-term investors. He laid out his vision, and built those networks. Verizon now is one of the largest in the U.S. and one of the most successful telecom companies.
Useem: George Buckley became chief executive at 3M at a time when companies were trying to tighten. The internal education and training function and research & development are long-term investments and the easiest to cut if you’re a short-term focused individual, because the rewards will not come for five, maybe 10, or even fifteen years. Sir George doubled down on research & development. It is 3M, so there’s a history there of its products being innovative.
Maggie Wilderotter exemplifies what directors can bring to the boardroom. She served on the board of HPE – Hewlett Packard Enterprise – in an extremely turbulent industry. She worked actively with CEO Meg Whitman to help [her] and the company more broadly appreciate where technologies were going to be.
“Chief executives can make a difference for the better when they’re on the side of the angels – and the opposite if they’re not.” –Michael Useem
Dumaine: One of the things [Wilderotter] and the board of HPE did with Meg Whitman’s support was they composed a letter to Meg, as if it had been written by an activist. They said, “If we were an activist, how would we think about this company?” and then went through X, Y and Z [scenarios]. You don’t have someone on the outside dictating terms. But if you know the direction you should go in, you can do it in your own way [to] foster long-term growth and prosperity. It was a clever exercise that ended up doing a lot of good for HPE.
Knowledge@Wharton: There are plenty of pressures – external and internal, and self-imposed – that CEOs and leaders face and that push them towards short-term thinking. What advice would you offer CEOs who want to up the long game?
Dumaine: Just beware of the trends going on in the world. Larry Fink, the CEO of BlackRock, which manages $6 trillion in assets, says that it would be key for CEOs to realize some of the changes going on in society. For example, [consider] this shift towards automation and artificial intelligence. A McKinsey study we cite in the book says that [those technologies] could displace 30% of American workers.
CEOs who want to survive in the long run, and want their companies to survive in the long run, have to be aware of what’s going on in society, and try to steer their companies to address some of these issues. If they do that, they’ll get the support of their investors, customers and employees.
Useem: We tended to focus on large companies, but [there are] lots of analogies for medium and small enterprise here, as well. Chief executives can make a difference for the better when they’re on the side of the angels – and the opposite if they’re not. I think Jeff Bezos (CEO of Amazon] was thinking 20 years out. With an ability to persuasively communicate that strategy story, you can do it. It’s hard. It’s uphill. It’s been done.