Why Some of the Most Successful Companies Fail

As the Director of CECP’s Strategic Investor Initiative, an effort to shift trillions in investor assets to companies that move away from the current myopic focus on short-term results, and adopt and communicate long-term strategies that integrate financially material environmental, social and governance (ESG) factors, the question I’m asked often is, "What’s the connection between long-termism and ESG adoption and integration?"

Despite a shifting regulatory environment, the demand for companies to think long term and incorporate environmental, social and governance (ESG) factors into their business model is growing.  Academic research shows that CEOs who incorporate sustainability into strategy, and have the discipline to also manage short-term financial expectations create more shareholder value.  While achieving the right environmental, social and governance (ESG) balance requires an investment of time and money, this shift in corporate strategy promises to deliver sustainable value and reduce risk in the long run.

Investors are now asking for 3- to 5-year goals and are encouraging CEOs to align their corporate objectives with those of their key constituencies. Managing to long-term goals that take a holistic view of the business creates the context for the short-term communication about quarterly earnings. That’s why increasingly, America’s largest institutional investors are asking the companies they invest in to provide long term plans that integrate financially material ESG factors.

Clara Miller, CEO of The Heron Foundation, makes a strong case for long-termism when she observes that well-managed organizations that focus on the long term in their regular operations create value, while poorly managed, unethical and exclusively short-term focused companies routinely extract value.  So, those companies that are creating value are better serving all their key stakeholders, including the communities in which they live and operate, while those that aim to only extract value are in most cases pursuing an unsustainable business strategy. 

Professor Clayton Christenson of Harvard Business School illustrates this point looking back at the telecommunications industry as it existed some 15 years ago.  At that time, Lucent and Nortel were the "darlings" of that industry, while Cisco was a relatively unknown.  Over the next ten years, Cisco would ultimately overtake Lucent and Nortel and emerge as the clear industry leader.  Why did this happen? 

Dr. Christensen opined that Lucent was vulnerable because they focused too much on maximizing their short-term quarterly profitability and did not invest enough in long-term R&D. "Tomorrow’s investments that pay off tomorrow go right to the bottom line, and are much more tangible than investments that pay off ten years from now," he said.  "The reason some successful companies fail is they are drawn to investing in things that provide the most immediate and tangible evidence of achievement…often with sad long-term results."

Companies that fail to balance short-term expectations with long-term results often overlook the importance of identifying and developing strategies to address material risks and opportunities in environmental, social and governance-related aspects of their operations and governance structure.  For example, unchecked global climate change represents material environmental financial risks to many companies and opportunities for others, but these long-term risks are mostly absent from quarterly earnings calls and annual disclosures. 

Societal shifts, changing cultural norms, and "planetary boundaries" create, for each company, its own unique future set of material risks and opportunities -are often invisible to short term investors – and traditionally viewed as non-material on a quarter to quarter basis. 

Leaders of the "Big Three" global asset managers, Vanguard, State Street and BlackRock, have begun to make the case that the long-term return horizon of their largely indexed portfolios needs congruent strategy disclosure from their portfolio companies begin communicating strategies that look three, five, and even ten years ahead.  They also point out that long-term performance plans create the context for ‘building blocks’ for short-term financial success, and are not a substitute for transparency.    

CECP, "The CEO Force For Good," was founded by actor, entrepreneur and philanthropist Paul Newman, and John Whitehead, former Chairman of Goldman Sachs.  They believed corporations and their leaders can and should be a force for good in society.  CECP’s Strategic Investor Initiative (SII) is a logical extension of this vision – creating forums where CEOs can present long-term plans to long-term investors, and demonstrate the greater sustained earnings power proven to come from longer-term thinking.

Leveraging CECP’s network of 200 CEOs and companies – representing over $7 trillion in revenues – SII is developing a public disclosure platform to help CEOs of the world’s largest corporations unlock the value of long-termism by enabling investors and CEOs to reach mutual understanding regarding companies’ long-term strategic plans including:

  • Long-term capital allocation.
  • Significant stakeholders and their long-term expectations
  • Metrics to track long-term progress on health, financial, operational, environmental, social, and governance factors.
  • Corporate governance structure and incentive system alignment to support long-term planning and manage short-term performance.

This month CECP will convene for the second time this year a group of leading institutional investors, CEOs and other senior leaders from global companies at its second CEO Investor Forum in New York City. Results and next steps will then be presented and discussed at New Metrics ’17, November 13-15, in Philadelphia.

Mark Tulay
Director, Strategic Investor Initiative
September 6, 2017

Share this with your network