Let’s start with this simple premise – businesses today talk about the importance of the customer, but in far too many cases make all their important decisions based on short term shareholder behavior.
This year opening day of the baseball season occurs one day after the Final Four teams are set for the NCAA Basketball March Madness– what an amazing time of the year for sports fans, and what a fantastic contrast between the two sports.
As the clock clicks down the final seconds on the basketball court, players, coaches and fans become hyper-energized – screaming, crying, racing onto the court, collapsing on the bench with a towel draped over their heads as a plea for privacy as they sob silently, while reporters scramble to be the first to get the “How does it feel?” question asked of the player who made or missed the last shot.
March Madness basketball brings an intensity that can only happen in a clock-driven sport. Baseball on the other hand is one of the few remaining sporting contests that “ain’t over ‘til it’s over”, as Hall of Famer Yogi Berra was fond of pointing out. Innings last as long as it takes to make three outs, and the game extends as many hours or innings as required to reach a win-lose decision.
It strikes me that in a world where social media leaks results before they are official, and CNN’s ratings depend on constantly having “Breaking News” to report, shareholder-owned businesses are “on the clock” in much the same way as most sports events. Analysts and Wall Street have convinced us that short term results should be the predominant criteria for investment decisions. Therefore, quarterly and yearend earnings reports drive businesses like the shot clock on the basketball court. As a direct result, the executives answering to the board and the employees creating whatever the market considers “performance” in their industry are increasingly driven to constantly “play” with buzzer beater intensity.
All of that clock-driven performance can too easily lead to burnt out employees and executives and far too often leads to bad decisions. Remember when the Big Three auto makers used to lay employees off at the end of every year to reduce inventories and payroll costs, and then spend the first quarter of the year paying everyone overtime to build enough cars to meet dealer demands? Those days may be long gone in the auto industry, but the pressure to get the numbers right by the quarter’s end still drives questionable decision-making across many industries.
By contrast, my first job out of grad school was with Hallmark Cards, a company that was privately owned then and remains so today. They were in the creative business with over 600 artists, editorial writers plus a cadre of packaging designers and inventive product managers. There was plenty of pressure to maintain a well performing business, but the lack of specific quarterly deadlines for publicly announcing performance allowed them then and now to take their time experimenting with new designs and product ideas. How else could a greeting card company still be in existence and profitable in a world dominated by email?
It seems to me there is a lesson to be learned here, and Warren Buffet has been sharing this secret for years – shareholders should stop letting short term results tell them where to put their long term money. The stock market is not intended to be played like the lottery, and will in fact treat your money like a lottery “investment” if you follow that approach. The Oracle from Omaha, Mr. Buffet, says to find companies you believe are good long term investments, buy their stock and leave your money there even on rainy days. He believes you’ll get richer with that approach, and I suspect we will also end up with healthier businesses, employees and executives.
We’d love to hear from you about examples of organizations whose hasty decisions netted results that didn’t play out well in the long-term.
Robert Hughes is an avid fan of frenzied basketball and thoughtful corporate investing. He is President of Overland Resource Group and can be reached at r.hughes@orginc.com.
