Do you find it odd that when a company announces a profit of $8.4 billion in a single quarter, the performance is reported as "disappointing"? Or $5.7 billion as "dreadful"? Fact is, these were the terms used to describe the results produced by Exxon Mobil and Royal Dutch Shell after their second quarter earnings release.
Almost all publicly traded firms are given "qualitative assessments" by analysts during earning announcement season, which influence investors. But too often the weight of Wall Street opinion causes executives to focus on hitting short-term earnings targets rather than creating long-term value. And even if executives' strategies are not playing to short-term expectations, they still have to spend a lot of time explaining why this quarter's earnings are not up to snuff.
So despite their robust, multi-billion dollar profits, analysts deemed Exxon Mobil and Shell's results "disappointing" and "dreadful" compared to previous quarters. And they use these terms even while acknowledging that the industry is facing lower oil prices, increased availability of natural gas, decreasing economic activity, and rising costs -- all factors largely outside of the companies' immediate control. The analysts also say that in the face of all this, both companies continued to make long-term investments and still delivered billions of dollars in profit. How is that "disappointing"?
Unlike Exxon Mobil and Shell, many other companies end up making decisions -- such as laying off staff or overpaying for an acquisition -- in order to appease these quarterly earnings pressures. In fact one of the surest ways to increase stock prices in the short term is to announce a significant layoff.
However, the reality is that most organizations can't be judged on a quarter-to-quarter basis. Strategies take time to unfold and bear fruit, and managers need time to develop their own capabilities and those of their teams. Yes it's important to achieve short-term results as a way to test new approaches and build confidence -- but these need to be put into the context of long-term value creation. Otherwise we run the risk of sacrificing our future.
But how do you keep the focus on long term value creation while the media and the markets exert pressure to do the opposite? Here are a few thoughts, not just for CEOs, but for all managers:
First, make sure that you have a dynamic, constantly refreshed strategic "vision" for what your organization (or unit) will look like and achieve three to five years from now. I'm not talking about a strategic plan, but rather a compelling picture of market/product, financial, operational, and organizational shifts over the next few years. Try to develop this with your direct reports (and other stakeholders) and put the key points on one page. This then serves as a true north to help guide key decisions.
Second, make sure that your various projects and initiatives have a direct line of sight to your strategic vision. Challenge every potential investment of time and effort by asking whether it will help you get closer to your vision, or whether it will be a building block to help you get there. Doing this will force you to continually re-balance your portfolio of projects, weeding out those that probably won't move you in the right direction.
Finally, be prepared to take some flack. There may be weeks, months, or quarters where the results are not on the rise, or don't match your (or analyst) expectations. Long-term value, however, is not created in straight lines. As long as you're moving iteratively towards the strategic vision on a reasonable timeline, you're probably doing the right things. And sure, you can always do more. But just make sure that you're doing things for the right reasons.
How can you minimize the short-term "noise" and keep the focus on long-term value?
Cross-posted from Harvard Business Online.