Short-term profits undermining corporate reputation and long-term value

The market cycle is failing corporate Australia and, by extension, society in general.

A decade after Jack Welch delivered a scathing assessment of the market’s focus on shareholder value by describing it as “the dumbest idea in the world” and “a result, not a strategy”, little has changed.

Companies big and small are driven more than ever by hitting next quarter’s numbers in response to shareholder pressure, without necessarily taking into account broader staff and social considerations, or potentially longer-term implications.

It begs the question – are these two factors mutually exclusive?

The EY Global Fraud Survey 2018 found the propensity of global executives who would justify fraud or corruption to help a business survive an economic downturn or meet financial targets has actually increased since 2016.

In part, this can be attributed to market volatility, short-term performance pressures and the market framework around formal reporting requirements, all of which are the subject of intense investor and media scrutiny. Combined with new technology, challenging market conditions and increased competition accelerating the pace of change, it’s not surprising that boards and senior executives find it difficult to look beyond the next results announcement.

With an entire market ecosystem built around delivering half-on-half earnings increases, how do company directors and senior leaders ensure that integrity doesn’t fall victim to short term profits.?

Long-term focus for long-term benefits

A great deal of data surrounds the fact that there’s a real and sustainable pay-off for companies who prioritise long-term strategy ahead of short-term targets.

A KPMG Global report found that the average annual revenue growth for companies with a long-term orientation was as much as 1.9 per cent higher over a 15-year period, with annual earnings generating growth of 8.5 per cent compared to 4.6 per cent for short-term oriented enterprises.

Leaders globally are taking notice. The Business Roundtable, comprising more than 200 US CEOs, issued a statement earlier this year that redefined a corporation’s purpose around employees, customers, and suppliers first, and shareholders second.

Make the fine fit the crime

A recent manifestation of market short-termism is the spate of ‘wage-theft’ cases, the most notable of recent times being Woolworth’s $300 million underpayment debacle. Paying workers their entitlements isn’t a business decision, it’s law. Clearly, the current penalties for non-compliance is not a sufficient deterrent for companies to ensure staff are at minimum, paid in accordance with the law.

The issue demands examination as to whether the underpayment was a genuine mistake based on the difficulty and complexity of the law, or a deliberate decision to minimize wage payments in order to boost short term profits. It seems incredulous that a company as large as Woolworths could be the recipient of such poor advice as to have accidentally underpaid so many staff for so long.

Celebrity chef George Calombaris’ MADE Establishment was fined a mere $200,000 for underpaying staff more than $7.8m. A slap on the wrist from a legal perspective. But for the company’s public face, any short-term financial advantage – inadvertent or otherwise – has been dwarfed by the damage to his personal brand and that of his restaurants.

Accordingly, it would seem that directors and companies should be more concerned by the risk media coverage for illegal conduct and public scrutiny associated with it, than the penalties imposed by the regulators. The brand damage associated with media coverage of non-compliant conduct seems to pose a greater risk to long-term shareholder value than the money saved by the non-compliant behaviour. Companies and their boards need to be put squarely on notice that complying with the law is not optional and nor is it a box checking activity.

For too long, companies have implemented compliance frameworks and training programs to ensure that in the event the regulator comes knocking, they can demonstrate that they made reasonable efforts to be compliant. Essentially there is a pervasive culture of paying heed to legislative requirements without being committed to their underlying objectives. The days of this type of defensive strategy have passed. Organisations need to be committed to the concept behind compliance requirements not simply implementing systems and processes to show they are compliant.

To do this, we need to see demonstrable role-modelling from the top of the behaviours and attitudes that define the way an organisation chooses to do business. It also means investing in effective, engaging training and professional development to make sure employees of all levels understand and adhere to the regulatory and legal environment in which they operate.

Boards, Directors and senior managers can no longer afford to cut corners to boost profits by ignoring compliance issues. Long term shareholder value has to be linked tightly with integrity, compliance and sustainability of brand.