It is widely believed that shortermism emerges as a direct consequence of various reasons that push managers and investors to focus on short-term performance as opposed to long-term prospects, stability and results. We advance the hypothesis that shortermism may also depend on poor leadership in VUCA contexts.
“Someone is sitting in the shade today because someone planted a tree a long time ago.”
“Money is a short-term result that incentivizes short-term decision making”
In this article we present an alternative explanation of shortermism, defined as a focus on short-term results at the expense of long-term ones. The widespread opinion identifies the main reason for shortermism in a wrong managers’ focus, which is unbalanced over the very short period: in an attempt to safeguard company performance in infra-annual (usually quarterly) accounting reports, managers and investment planners give priority to the choices that allow stabilizing the profits in the short term rather than the choices that, while making better results in the medium and long term, require an immediate sacrifice of profitability.
In VUCA contexts, this explanation is at best partial. When the context is complex and uncertain, in fact, any attempt to predict or anticipate the future evolution of the reference context is likely to be vain. Consequently, managers and investors will be led to drastically shorten the time horizon with reference to which they will make their decisions, ending up adopting a short-term perspective. Despite seemingly imposed by the circumstances, shortermism can be countered by the adoption of effective leadership, based on a subjective narrative coherent with the vision and mission of the company rather than on any anticipation of the evolution of the context.
Shortermism and its implications
Focusing on short-term results necessarily means sacrificing prospects, stability and medium and long-term results. This phenomenon can have perverse and pathological features that can lead to the failure of a project, an initiative or a company. This phenomenon is known as shortermism.
A recent article in the Financial Times claims, for example, that the short-term perspective is undermining the success of sustainable business models. In particular, the article focuses on the trade-off between long-term perspective, which implies the need to make investments aimed at promoting sustainability, and a short-term perspective, which implies instead the need to reduce investments in order to preserve the profitability and avoid a negative impact on the share price.
Causes of shortermism and solutions that are currently considered
The article correctly suggests that shortermism emerges when the short-term perspective prevails: due to the relentless pressure exerted by quarterly reporting, management prefers to achieve quick wins and neglects long-term goals, such as sustainability.
The action of traders reinforces the tendency towards shortermism: they buy and sell shares based on the observed price trends. This approach to trading focuses on short-term price fluctuations rather than on the fundamentals of exchanged shares.
In an era like ours, characterized by significant and relentless changes, breaking out of shortermism and adopting a long-term perspective appear critical and urgent. To this purpose, many leaders and practitioners have invited managers to change the focus of their decisions, by abandoning a short-term perspective in favor of a long-term perspective.
For example, in 2000, in order to counter shortermism, Warren Buffett, managing director of Berkshire Hathaway, wrote a letter to the shareholders in which he encouraged managers to focus on long-term strategies rather than quarterly earnings. Like Buffett, others have also identified the main cause of shortermism in the wrong focus, too unbalanced on the short term.
A different cause of shortermism in VUCA context
However, one wonders whether shortermism can also arise because of a different reason. For example, it is worth asking whether shortermism is somehow due to the complexity and the uncertainty of the context in which a company operates and to poor leadership in such context. This hypothesis appears persuasive when studied with reference to companies operating in VUCA contexts, such as those that emerge when companies operate in business ecosystems or on a global scale. In these cases, companies are exposed to the effects triggered by the interdependencies that characterize an ecosystem or to those that inevitably emerge when the reference market span the entire globe.
While in stable, predictable, elementary and certain (SPEC) contexts, shortermismis mainly due to the myopia of the leader, who focus on short-term priorities as opposed to medium and long-term objectives, in VUCA contextsshortermism tends to emerge for a different reason: complexity and uncertainty make it almost impossible to elaborate reliable medium and long-term forecasts.
As a result, any attempt to anticipate future events will be vain and decision makers will tend to drastically shorten the time horizon of their decision-making process. The short-term perspective and the ensuing shortermism seem inevitable due to the circumstances.
Proposed solution to shortermism in VUCA contexts
So, should managers operating in VUCA contexts surrender to shortermism? If so, should managers plan to undertake only investments to enhance the agility of the company, in order to quickly react to the unpredictable changes occurring in a VUCA context? The answer to both questions is “no”.
In VUCA contexts, more than in SPEC contexts, it is important to develop a long-term perspective. However, the leader should develop a long term perspective not on the basis of an attempt to anticipate the evolution of the reference context, which would bring the leader to shorten the time horizon of his decisions, but rather on the basis of a subjective narrative in coherence with the vision and mission of his initiative, his project or his company.
Therefore, in a VUCA context it is not enough for the leader to shift the focus of his analysis from the short to the long term. The leader must
- identify a direction in which to lead his project, own initiative or company,
- develop a long-term perspective that reflects the direction identified, and
- work with the management of his organization to identify the investments necessary to pursue it.
In the absence of a clear direction, the long-term
perspective cannot be developed and the investments that the leader will undertake
will be ineffective, if not harmful.
Warren Buffet was right when he wrote his letter to the shareholders. His suggestion, although correct, is however insufficient to avoid shortermism in VUCA contexts.