(Source: Flickr)
This is the second instalment of my conversation with Nigel Lake, CEO of Pottinger, a global corporate advisory firm based in Sydney, Australia. Nigel is the author of The Long Term Starts Tomorrow, a must have book “for any manager, leader or Minister.” The Hon Mike Baird MP, Premier of NSW
Tom: Do you think that short term financial metrics are part of the problem in developing long term strategy?
Nigel Lake: Absolutely, I think they are a very fundamental part of why very large organisations don’t make good decisions on an amazingly frequent basis.
A simple analogy is that if you’re driving down a motorway you actually need to look further ahead, and if you stare just in front of yourself you will crash and probably die.
Very large organisations do this.
Nokia is a very good example of a company [that was dominated by this kind of myopia].
One of my colleagues at Pottinger held an iPhone in his hand in about 2003, which was four years before Apple had the iPhone, except that the iPhone said Nokia on the bottom of it.
But everyone at Nokia knew that people liked candy bar phones and that that would never change, and so they never launched the iPhone.
Tom: Oh really? So Nokia had the technology to develop and produce an iPhone several years before Apple released it?
Nigel Lake: A phone which for all intents and purposes was very much an iPhone like device.
Now the even deeper point is that people who worked in technology knew that something like the iPhone would come about roughly when it came about in at least the early 90’s.
The iPhone was essentially a proper computer which was small enough to be a phone, and to get there was a journey of miniaturisation of processes, improving battery technology to be able to store the power to run the phone for long enough that people would think it was useful, and the improvement of the screen technology.
All of those things have been on Moore’s law progressions for an amazingly long period of time, and those things all crossed over to be a computer like phone some time in the middle of the first decade of the naughties.
People knew that was going to happen ages ahead but large organisations did nothing about it. HP is an example. I know there were people working at HP in the early 90’s in the UK who said “these things are coming”, but no one was interested.
It’s ten years away, why would you bother? And for Nokia it was five years away, and it’s like, why would you bother? And then Apple comes along, and Nokia goes from being the biggest phone company in the world to not being a phone company.
Tom: That’s very interesting. One of the ideas that I’ve been thinking about recently is that financial metrics are basically designed to evaluate how much you are getting out of a company, your cash flow take from the company. But the goal of a company is actually to give value to customers and to the community. And so, there appears to be a disparity between what companies do and what the metrics are measuring. What are your thoughts on that?
Nigel Lake: That is absolutely right, and I’ve spent quite a lot of time thinking about precisely that set of issues.
Where my own thoughts have gone is that if you take a very short term approach then there is a massive conflict between what’s in the interests of shareholders and what’s in the interests of customers. The shareholders just want to sell as much product for the highest possible price, never mind the quality or impact on any other stakeholder in the entire ecosystem, and then pocket the profits and run.
If you take a longer term view then the financial metrics will tell a different story, which is that if you abuse your suppliers and you abuse your customers then they will go away and you won’t have a business left. The high profits in year one may turn into no market capitalisation by year five.
A lot of people have worked through this saying, okay short term financial metrics don’t work, let’s look at different forms of triple bottom line reporting or measures of broader impact.
One of my friends runs a US business called HIP Investor (for Human Impact + Profit) which is a sustainable investment type business where they have created a set of metrics which measure the sustainability and non-financial impact of an organisation. They apply those metrics to all the companies in an index, re-weight the index along this new sustainable basis, and an investment in their portfolio (which is a re-weighted index portfolio) outperforms the index and has lower risk.
So you can go down that path, but where I’ve gone down is a different route to the same answer, which says that if you take a longer term view you will make different decisions about how you should treat all the stakeholders in the ecosystem. And you will then start to realise that thinking more broadly about how you create value is very much in the interests of your company.
One of my current areas of focus is this broader area of sustainability. I think that there are amazing opportunities in that. The Royal Mail in the UK is one example of an organisation that really drove this kind of mindset over a fair period of time, and from what I understand achieved quite significant results in making the whole thing more efficient, and having better environmental outcomes as a result.
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