Before Christopher Columbus proved them wrong, 15th century seafaring captains believed the world was flat and ended at the horizon.
Their 21st century cousins?the CEO captains of industry?suffer from a similar myopic vision, one that is measured in fiscal quarters rather than horizons. Many CEOs believe and act as if the business world ends every 90 days when they close their quarterly books, says Campbell R. Harvey, the J. Paul Sticht Professor of International Business at Duke University’s Fuqua School of Business. And in doing so, those CEOs are mortgaging their companies’ future existence.
Harvey’s report, which he coauthored with two other professors, is titled “The Economic Implications of Corporate Financial Reporting.” In it, the authors review how American companies are currently managed. The report’s main contention is summed up in this scathing indictment: “The majority of firms view earnings, especially earnings per share as the key metric for an outsider, even more so than cash flow. Because of severe market reaction to missing an earnings target, we find the firms are willing to sacrifice economic value in exchange for smooth earnings.”
That last sentiment bares repeating: Companies are willing to sacrifice the long-term economic value in order to meet short-term earnings targets.
Unfortunately, CEOs who are focused so intently on quarterly earnings goals may end up creating something of a self-fulfilling prophecy. Businesses that continue to operate as if the world ends every 90 days?and focus their human and fiscal capital on pleasing Wall Street rather than pleasing customers?will eventually fall off the face of the corporate landscape.
What’s it like at your company? Is your CEO one of those captains who can’t see beyond that 90-day horizon? Or is your CEO a modern-day Christopher Columbus, convinced that structuring the company for the coming era of sales and market-share growth?growth that may still be hidden beyond the quarterly horizon?is the best way to sail the ship?