Long-Term Orientation Improves Business Performance

by Vikas Vij

Having the ability to envision the company’s future is a critical element of successful corporate leadership. Setting bold, long-term goals allows a company to move into new, emerging areas of growth and opportunity and become future-ready. 

A new research study titled “Does a Long-Term Orientation Create Value?” slated to publish in a coming issue of the Strategic Management Journal, supports the view that corporate leaders should focus on long-term gains to attain a dominant market position and create a more secure future.

The study’s authors, Caroline Flammer of Boston University’s Questrom School of Business and Pratima Bansal of the University of Western Ontario’s Ivey Business School, argue that an increased long-term orientation fosters innovation and enhances the market value of a business.

Flammer and Bansal conclude that switching to a long-term outlook can improve a company’s operating performance by several measures – return on assets, operating profits, and sales growth – within two years. Myopic leadership, on the other hand, will hamper business due to lack of investment in innovation and risky projects.

As part of the study, the management researchers set out to examine companies whose leaders made a clear break with short-termism. They identified 808 shareholder proposals on long-term executive compensation plans between 1997 and 2012, and measured the effects of the approved proposals over time.

Following the passage of long-term incentives, the researchers found that companies boosted their efforts to innovate and pursue riskier forward-looking projects. More specifically, businesses increased their research and development spending, which led to surges in the number of patents they garnered.

Flammer and Bansal also found that companies whose boards narrowly approved long-term executive incentive proposals saw their share prices jump 1.14% on the day the measures passed, compared with companies where shareholder proposals were narrowly rejected.

Indra Nooyi, CEO of PepsiCo Inc., exemplifies the long-term business approach. Nooyi identified health and wellness as one of the company’s biggest growth opportunities when she became chief executive in 2006. She has boosted R&D spending and stayed focused on transforming the maker of sugary soft drinks into a company where sales growth of healthy products outpaces the rest of the portfolio by 2025.

Source: WSJ

Image Credit: WSJ/Jemal Countess/Getty Images