The Real Dilemma All CEOs Face
It’s an age-old dilemma: public companies are perpetually caught between the virtues of long-term strategy that drives stakeholder value and the evil pressures of the quarterly earnings cycle. At least that’s what we hear.
Funny thing is, I never saw the dilemma. CEOs know who their stakeholders are: customers, employees and shareholders. Last time I checked, they all want the same thing: a pipeline of great products. That’s what creates long-term value for all your stakeholders. So where’s the debate? What’s the issue?
You might think that’s a sort of naïve viewpoint, but as a 30+ year management consultant and former senior executive with several publicly traded companies, I assure you, it’s anything but that.
This is why CEOs make the big bucks. To manage short-term pressures while maintaining focus on the long view, where it belongs. And that means delivering great products and services that customers love. That’s what drives long-term value. That’s what everyone wants.
Granted, there are activist investors out to agitate for short-term gains, but that only works if management doesn’t have the confidence of its stakeholders -- and that usually happens when they’re not doing their job.
Take Apple (NASDAQ:AAPL), for example. With a remarkably small leadership team and supportive board of directors, Tim Cook maintained a razor-like focus on product development and execution in the face of enormous shareholder pressure over a rough and tumble two-year period.
During that time Apple’s stock lost about $300 billion of value over mounting concerns that Google (NASDAQ:GOOGL) Android and Samsung had won the smartphone war, Apple had lost its innovation mojo and Cook couldn’t fill the enormous shoes of Steve Jobs. The media was all over it. Talk about pressure. It doesn’t get any more pressurized than that.
And yet Cook stayed the course and delivered. Now customers are happy, the stock is trading at an all-time high so investors are happy, last week for the first time the company’s market cap broke $700 billion and all is well.
Microsoft (NASDAQ:MSFT) had an even rougher ride, surviving a decade-long nuclear winter before regaining investor confidence and showing significant gains over the past couple of years. It may have taken a sweeping strategic and organizational rework by former CEO Steve Ballmer and new chief Satya Nadella to get Wall Street excited again, but the company’s leadership did not succumb to short-term pressure.
While Microsoft did appoint an activist investor to its board, ValueAct actually brought good ideas to the table that helped revitalize the company. And some of those ideas, including Ballmer’s accelerated retirement and making Office more broadly available on Apple’s iPad and Google’s Android platforms, have indeed come to pass.
In any case, the major holders of both Apple and Microsoft stock are the same institutions that own much of corporate America: State Street, Vanguard, Fidelity Mutual et al. As long as they feel confident that their portfolio companies are well managed and will deliver long-term value, they’re not likely to flip in a proxy battle.
And therein lies the rub. Not every company fits that description. Not every company is well managed and positioned to deliver long-term shareholder value. Not by a long shot. That’s where the real dilemma lies.
Dell founder and CEO Michael Dell took to the Wall Street Journal’s op-ed page last week to tell us how wonderful it’s been since Dell went private. He talked about “a confluence of factors” that led to that decision, including “an affliction of short-term thinking that drove a wedge between our customer and investor priorities.”
He closed with an impassioned message, “We need to find ways to get out of the destructive cycle of nearsighted decision-making and focus on a future that is far beyond the next quarter or fiscal year ... In this fast-paced, uncertain time, one thing is certain: If we aren’t the ones inventing the future, someone else will be.”
But I wonder whom Dell’s message is for. If he had a credible vision for reversing Dell’s spiraling market share, if he had an effective strategy for reinventing the company and giving investors confidence that Dell would be the one “inventing the future,” I doubt he would have had such a rough bout with activist investors and short-term pressure.
He did, however, raise a good point about H-P splitting itself into two companies to “boost share values in the short term … at the expense of real innovation.”
The irony is, while H-P CEO Meg Whitman’s solution to the “dilemma” may have been different than Dell’s, I think they both shared the same problem: Neither CEO knew how to fix their company. Neither executive had a viable strategy to make customers or investors jump for joy.
That, to me, was the real dilemma. And neither CEO had what it takes to solve it. They just copped out in different ways.