CEOs need to go long

November 27, 2019

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Martin Newman

By Martin Newman

The Consumer Champion

Speak to any financial professional today and if they don’t tell you there’s a downturn coming then they’ll likely admit we’re overdue one. For retail this presents a potentially perfect storm as our high street shops have already been struggling with increased competition online and uncompetitive business rates. If you add a recession into the mix, even one in which consumers buy just marginally less goods, this may well spell the end for their company.

For CEOs this presents a fair amount of pressure. Most are needing to reinvent their firms, identify and access new markets, deal with shrinking margins and pay out dividends. In such situations it isn’t surprising C-suite captains invariably find themselves walking the plank. 

But perhaps the biggest danger here, to CEOs, shareholders and customers alike, is the spectre of short-termism. This is not to say planning for the short-term is inherently bad but everyone in the industry should understand how the pressure to keep share prices alive and investors happy can lead to dangerous tailspins. If you’ve been putting off the need to invest in a new digital platform to save costs, or if you’ve delayed selling off floorspace to keep market confidence, then you’re only going to make the eventual hit harder when it comes. But if your brief is to deliver and maintain a certain valuation above all else, then you’re in a bind. 

This is one reason we see firms failing, having seemed profitable just a quarter or so before. CEOs might not know whether they can maintain profit for four consecutive quarters but they will know they won’t reach two consecutive quarters if they can’t reach one. In that environment, short-termism trumps any long-form planning. 

The need to deliver under such pressure is why CEOs command such high salaries. But, again, this can feed into the vicious circle of short-term thinking. Yes, a high pay package could mean you hang onto a competent leader in a competitive space but it can also lead to a smash and grab approach that incentivises undue risk by top desks with no connection to the workforce other than by the chain of command. Further, if they are paid too much then, however good their performance, their pay package could well become the story – something that’s not good for your staff morale or your high street brand.

Short-termism leads to short-termism and, more often than not, all the things you don’t want: a volatile share price, a compromised service and a lack of emphasis on innovation and product improvement. Retail is all about brand but the stability we associate with the best retail brands is powered by some furious duck paddling below the water and a serious long-term vision. 

Boards who back CEOs with a plan tend to be rewarded over the medium to long term. Those who equate dividend payouts with customer satisfaction are making a mistake. Both are important but only one is essential.

It’s clearly not rocket science. When it comes to long term thinking it’s hard to get better than EasyJet. Last week they announced they would offset all their carbon emissions; spending money to reduce CO2 levels and plant more trees. Planning for its brand, the future of the planet and their consumers. And, oh look, their share price has gone up too….

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