Prosperity for the longterm

In textbook terms, short-termism is a concentration on short-term projects or objectives for immediate profit at the expense of long-term security.

It can manifest itself in decisions based on very short time horizons or even through inaction by a board. A sin of omission is as bad as a sin of commission.

Short-term objectives are not in and of themselves detrimental to an organisation.

Effective strategies will certainly have short, medium and long-term objectives.

And, clearly, there are times when a focus on short-term risk or opportunities is necessary. This is particularly true in a time of rapid change or during a crisis.

The problems arise when short-term decisions are made in response to the instant gratification that shareholders, stakeholders and markets demand today, because it is easier than implementing a long-term strategy.

The consequences of those decisions can be acute. It can mean that opportunities for creating enduring long-term value are rejected or missed. It can mean that executives who receive incentives for short-term achievement take significant risks which do long-term harm, not good.

Despite this, the willingness of boards to balance long-term objectives with short-term needs is increasingly under question.

Directors can also be hamstrung by the instant news cycle and constant social media scrutiny, both of which are dominated by populist narratives that often fail to consider any real facts but quickly gain credence.

Private equity firms are an important element of efficient capital markets that can help companies find a sustainable path to success. But as the Dick Smith collapse starkly illustrates, hit-and-run private equity with no interest in creating long-term viable businesses or value do not contribute to our economy.

As Dick Smith continues to unravel, the duties of directors on both sides of the transaction will appropriately come under scrutiny by the regulators and the public.

Short-termism pervades all organisations.

It is only natural that government – as the policy owners – will appoint directors to fulfil their agenda. But there is a big difference between select appointments at an appropriate juncture and cutting a swathe through boards mid-term who still have much to contribute to an organisation.

Not-for-profits constantly struggle with short-termism in the form of unpredictable government funding. No listed company would be expected to operate efficiently if it couldn't predict its income from one year to the next, so it's unfair that not-for-profits which provide critical services to the community are expected to do so.

It is very easy, then, to paint a picture that says short-termism in boardrooms is largely the result of external forces – that directors have little or no control over these factors, and that it is therefore up to others to fix the problem.

But this is not the whole story.

Directors must change their own behaviour to overcome short-termism and the impact it can wreak on organisations.

One of the biggest contributors to short-termism in boardrooms is the creeping tendency towards groupthink among directors – the temptation to all go along with the majority course of action.

Groupthink is a pattern of thought characterised by self-deception, forced manufacture of consent, and conformity to group values and ethics.

The hard part is to stand alone in the market and make the right decisions against the perceived norm. This is how the great innovators all started. It is up to directors to take the best, not the easiest decision.

Diversity can be an important antidote to groupthink, and that is one reason the AICD argues for it so vigorously. It can help to ensure that boards are composed of directors who have complementary attributes and offer a range of perspectives, insights, and views in relation to issues affecting the organisation.

Directorship is a privilege that brings with it a great responsibility. That responsibility includes directors pushing themselves to constantly do better, to question themselves as much as they question the executives who report to them.

If the country's directors commit to abandoning the short-term focus that risks becoming endemic in our boardrooms it will not only be our organisations that prosper, but Australia-at-large.