Short-Termism Hinders Innovation; How To Mitigate It

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Short-term financial pressures often prevent companies from investing in emerging technologies. How can boards work with CEOs to ensure short-term results while creating the long-term future?

Short-term pressures often prevent companies from investing in emerging tech. How can boards ensure short-term results while creating a long-term future?

To thrive on the drive towards the new digital economy, it’s no secret that companies have to adapt quickly.  Emerging technologies like AI, cloud computing, blockchain, robotics, and augmented reality are disrupting industries and increasingly becoming mainstream.  Because of their complexity, it’s taking much longer than in the past for companies to successfully deploy transformative innovation into their business processes, products, and services.  This only means that businesses need to be moving faster than ever before, and should be investing now for the long-term to avoid falling behind the curve.

Short-term financial pressures, however, often prevent companies from taking this action.  Relentless focus on earnings per share causes the financial system to incentivize short-term behavior, creating a vicious cycle. Shareholders, CEOs, and investors care most about increasing shareholder value, and long-term investments don’t show returns to the bottom line as quickly.  Record corporate tax cuts and share buybacks in 2018 pushed earnings to peak levels, but we’re already seeing a fading effect of those tax breaks as the U.S. economy heads into a mature, late-phase cycle, with projected growth slowing significantly in 2019.

Boards face a paradox — ensure short-term results while creating the long-term future.  Those with a sense of urgency who adopt new technologies faster will be in a stronger position to stave off external disruption, and will reap the rewards sooner rather than later.  How can boards and CEOs work together to make this a reality?

1. Adopt A Longer Time Horizon

Boards need to explicitly support their CEO to adopt a longer time horizon.  Brian Chesky, Airbnb Co-Founder and CEO, spoke directly to this issue when he discussed Airbnb’s commitment to adopting an infinite time horizon:

“…the problems Airbnb can have a role in solving are so vast that we need to operate on a longer time horizon…Companies face pressures based on legacies from the 20th-century, and the convention is to focus on increasingly short-term financial interests, often at the expense of a company’s vision, long-term value, and its impact on society…I know that a lot of companies are thinking about being long-term oriented, but an alternative way of thinking about it is being infinite.”

Being an infinite company, he clarified, doesn’t preclude the need for a sense of urgency and a clear set of short-term goals to reach the company’s long-term vision.  How should companies go about measuring investment in long-term innovation, in the face of short-term pressure?

2. Spend Time on Innovation Metrics

A different set of benchmarks is needed to oversee the innovation process.  This can help insulate a company’s innovation efforts, as well as provide a common language boards and management teams can use to more easily discuss and monitor the company’s innovation performance over time.

Instead of the typical “output” or “lagging” metrics used for mature companies with stable products (revenue, growth, market share, shareholder value, etc.), companies should focus on “input” and “leading” metrics.

Truly innovative products, business models, and service approaches will take time to incubate and develop, and will be slow to scale and achieve profitability.  It’s necessary to measure progress by our investment and behaviors towards building the future state, instead of focusing on impact to the company’s bottom line in the short term.  Airbnb, for example, uses an output metric like Nights Booked.  But it also measures “input” metrics, like the number of new hosts, successful customer service interactions, and site quality.

Innovation metrics can also be used to support an emphasis on innovation for the organization, including leadership behavior, employee performance, and customer related innovation.  Leadership, for example, can be measured on the percentage of funding allotted to game changers vs. incremental innovation, the percentage of senior executives’ time focused on the future, and/or the percentage of new innovations that comes from external sources, such as partnerships.

Companies should identify the right mix of metrics and apply them, ideally without missing other potential opportunities or valuable projects that arise simultaneously.  To be sure, innovation requires letting go, tolerating ambiguity, and seeing what results you get.  Being intentional about managing and measuring innovation, apart from Wall Street demands, should be a priority for boards and CEOs.  Doing so will yield rewards beyond the current quarter.

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