American business must be free to manage long term.

• Author: Raynolds, Edward O.
• Position: Management Strategy

American business must be free to manage long term

Let me advance this proposition: the managers of American business will forfeit any chance they have to succeed in the world marketplace unless they make it their overriding mission to manage for the long term. They will achieve this only if they also work to create the kind of ownership that will allow them to run their companies for the long haul.

We all know what American management is up against today. We all know what kinds of inroads that the Europeans, the Japanese, and now the Koreans are making into our markets - both domestically and internationally.

Just one example: television sets. Twenty years ago, there were 18 U.S.-owned companies and zero non-U.S.-owned companies making TV sets for the American market. Today, there are 17 non-U.S.-owned companies and just two U.S.-owned companies producing TV sets for sale here.

Why is U.S. business losing ground? Many people believe it's because too many American executives are yielding to pressures to manage short term.

Business Month magazine recently did a survey of CEOs and found that a resounding 86 percent believe that business is generally too short-term oriented. Forty percent - two out of five - even admit that their own companies are managing too short term.

Only 4 percent believe companies are doing a good job of competing in foreign markets. And just 6 percent think companies are planning effectively for the future. What are almost universally identified as the culprits for short-term management are the demands created by Wall Street's insatiable desire for short-term gratification.

Today's market and today's financial entrepreneurs seem to have made short-term thinking into a kind of religion. In the heat of today's biggest transactions, time horizons get crushed down as tight as matter in a black hole. The operative interval for some of the legal or investment banking superstars in these deals may be the two or three weeks that it takes them to walk away with a fee as large as $20 million. In the corporate world, the most extreme example of short-term thinking is the management buyout, or LBO. Of course, LBOs themselves often spring from the immediate pressure of a takeover threat.

For the owners of the gone-private enterprise, an LBO holds out the chance for significant financial enrichment, especially if the enterprise is later able to become a "born-again" public company with a nifty stock price.

But, to do an LBO, the enterprise needs to take on a mountain of debt - often high-yield. Interest payments are staggering. The obsession of management becomes, therefore, to maximize cash flow.

The argument is, of course, that this extreme leveraging creates intense positive pressures for performance. Fat is pared away. Perks disappear. Efficiency is king. The company becomes a lean, mean cash machine.

You can listen to people on both sides of the question debate whether LBOs are good or bad for America. But one way to think about LBOs is to compare a company to the body of an athlete. An enterprise that's run for the long term is like an athlete who gets a...