The 'Elephant in the Room' is Getting Bigger: SHORT-TERM BIAS IN A POST-COVID WORLD: Judicial trends are guiding Directors to the long term.

• Author: Johnson, Keith
• Position: STRATEGY

Short-term bias in corporate thinking is still the "elephant in the boardroom." Everyone knows it is there. And everyone knows that, in the post-COVID world, short-termism in corporate decision making is as problematic as relying on a 3-mile radar for a supertanker. Yet most corporations have a strategic focus of three to five years at the most.

However, several major trends are converging that could finally provide strong reason to confront this elephant:

* Reputable empirical business research showing dramatically that long-term strategic assessment can improve the bottom line.

* Recent trends in the Delaware courts recognizing corporations' obligation to maximize profits in the long term and broadening the fiduciary duty obligations of directors to think long-term.

* Strong public commitments by mainstream business leaders from the Business Roundtable and others, like BlackRock, to long-term investment goals.

* The mainstreaming of the "sustainable investment" movement.

* COVID itself, which has shaken up traditional business models.

We do not lack for metrics or techniques to focus more on the long term. Business schools have taught these principles for decades. The power of applying such techniques is that they are a win-win: They accomplish the goals of better long-term profitability and address broader social goals as well.

How long-term strategic planning improves performance

Empirical research by McKinsey and others shows the dramatic difference between a short-term accounting bias and long-term strategic accounting:

* 85% of S&P 500 companies use only strategic planning horizons of less than five years--shorter than a typical business cycle.

* 75% of the S&P 1500 have no long-term measures of capital efficiency.

* 85% of S&P 1500 companies use long-term incentive compensation plan performance periods of less than three years.

* A subsequent October 2020 survey by McKinsey and Focusing Capital on the Long Term (FCLT) identified an increase in short-term company behavior between 2015 and 2019.

On the other hand, the small minority of companies that manage a long-term strategic plan outperform peers on almost every financial measure that matters. A 2017 Harvard Business Review article by McKinsey and FCLT reported that, from 2001 to 2014, average revenue and earnings growth of companies managed for the long term were respectively 47% and 36% higher than their peers. Average company economic profit was 81% greater, and market...