by Terence Jeyaretnam
Since the GFC, every in-depth business or government conversation is clouded with the sense that uncertainty is the new norm. That the economy is wobbly, that environmental degradation is adding to its volatility and societal unrest is concerning governments and businesses, especially in nations with high levels of unemployment. If you imagine being in a rowing boat, you’ve just managed to lose some of your oars, the waters have become choppy and some of your crew have become tired and agitated. What do you do?
Capitalism, led by the west, has incrementally narrowed our view on performance to be as short-term-focused as possible to generate profits. Governments are also on a short leash, with three and four year terms. Politicians follow the populist route to votes and offer quick-fix solutions while letting long term issues such as infrastructure, health and education fester. The consequence is a lack of attention to, or investment in, the things that matter in the long term.
For example, bipartisan support for long-term investments in the economy has been lacking. In complex policy problems like climate change, health and government science funding, long-range thinking may be traded-off for shortsighted band aids, or indeed put-off. In a working paper in the Journal of Risk and Uncertainty, Harvard University economist Lawrence Summers and political economist Richard Zeckhauser argue that we should act with greater care toward future generations. But, politicians understand that long-term issues are not the ones that win votes, and hence down-play them in favour of front-of-mind priorities.
The question for leaders in private and public sectors is simple. What needs to change in the way success is measured so that leaders are incentivized to keep one eye on the future at the same time as being rewarded for short-term performance? It is easier said than done. It requires governance bodies to prescribe key performance measures that deliver short term results while ensuring investment in the long-term.
Executive remuneration has been quite topical over the last few years when remuneration reports have regularly been rejected by shareholders. Would it not be more sensible to focus on metrics such as evaluation of pay based on assessment of long-term value creation within the firm (focusing on factors such as innovation and efficiency), longer-term periods for evaluation of executive pay, and an at risk component for not reaching performance goals? Such metrics will drive executives to think beyond quarterly earnings report (which focus on targets at the expense of long-term value creation).
There’s a growing train of thought that parallel bodies are needed within firms and governments – one that focuses on today’s agenda, and one on tomorrow’s.
Terence Jeyaretnam is a Director of Net Balance (email@example.com),
one of the world’s leading sustainability advisory firms.
Terence is based in Melbourne.
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