Reconciling long term vs short term in a company's life

If it weren't for the difficulty to supplant the cash coming from public markets, one might be inclined to question the financial markets. It is not an isolated instance for the financial markets to be portrayed as mere obstacles confronting the otherwise strategic corporate executive with the imperative of delivering quarterly numbers at the expense of long term profitability in the publicly traded companies.

Ian Davis, the worldwide managing director of McKinsey & Co., is one more voice, among the few of this profile, to take exception with such views. Mr. Davis, in a 4/10/05 article with FT, strongly suggests that, in the well-run and managed company, the health of the company balances very well with long-term performance. Such an approach, the author says, encourages "management teams to understand how to look after the company today in a way that will ensure it remains strong in the future."

We are also reminded that share prices reflect the market expectations of future performance, and "in almost all markets around the world, 70 to 90 per cent of the stock market value can only be explained by the cash flows beyond the next three years."

Mr. Davis identifies the following indicators management teams should consider for the health of their companies:

• a robust and credible strategy;
• productive, well-maintained assets;
• innovative products, services, and processes;
• a fine repute with customers, regulators, governments, and other stakeholders;
• the ability to attract, retain, and develop high-performing talent.

Following such prescriptive indicators, Mr. Davis goes on to acknowledge that, in a recent survey, the majority of executives indicated they would forego "an investment that offered a decent return on capital if it meant missing the quarterly earnings expectations."

Among the offered suggestions, one is particularly interesting: "Companies must first identify investors who will support their strategy and try to attract them. [...] Management teams should then talk to these investors about the metrics the company has developed to track both performance and health, be they product development, customer satisfaction or retention of talent.

So, in other words, management should take care of both the sort-term and the long-term in companies, and communicate what they are doing.