Short term Thinking in Investment Decisions of Businesses and Financial Markets

Short term Thinking in Investment Decisions of Businesses and Financial Markets

 

When companies buyback shares and pay dividends rather than investing in new capacity, it leads to low economic growth and low aggregate demand.

Central Banks respond by cutting interest rates.  Yet Businesses do not invest in new capacity.

Many studies attribute this to short term thinking dominant in corporate investment decisions.  Pressures from shareholders push corporate managers to be short term oriented.

Many economists and thinkers have criticized this recently as advanced economies are suffering from anemic growth.

Larry Summers has invoked Secular Stagnation.  He says one of the reason for Secular Stagnation is short term thinking.

Andy Haldane of Bank of England has criticized short term thinking as it prevents investments and causes low economic growth.

Key Terms:

  • Quarterly Capitalism
  • Secular Stagnation
  • Short Term Thinking
  • Low Economic Growth
  • Business Investments
  • Real Interest Rates
  • Monetary Policy
  • Income and Wealth Inequality
  • Aggregate Demand
  • Productive Capacity
  • Productivity growth
  • Long Term Investments
  • Share Buybacks
  • Dividends
  • Corporate Cash Pools

 

Capitalism for the Long Term

The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue for the current generation of executives. Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a strong desire to return to the comfort of business as usual. But that is simply not an option. In the past three years we’ve already seen a dramatic acceleration in the shifting balance of power between the developed West and the emerging East, a rise in populist politics and social stresses in a number of countries, and significant strains on global governance systems. As the fallout from the crisis continues, we’re likely to see increased geopolitical rivalries, new international security challenges, and rising tensions from trade, migration, and resource competition. For business leaders, however, the most consequential outcome of the crisis is the challenge to capitalism itself.

That challenge did not just arise in the wake of the Great Recession. Recall that trust in business hit historically low levels more than a decade ago. But the crisis and the surge in public antagonism it unleashed have exacerbated the friction between business and society. On top of anxiety about persistent problems such as rising income inequality, we now confront understandable anger over high unemployment, spiraling budget deficits, and a host of other issues. Governments feel pressure to reach ever deeper inside businesses to exert control and prevent another system-shattering event.

My goal here is not to offer yet another assessment of the actions policymakers have taken or will take as they try to help restart global growth. The audience I want to engage is my fellow business leaders. After all, much of what went awry before and after the crisis stemmed from failures of governance, decision making, and leadership within companies. These are failures we can and should address ourselves.

In an ongoing effort that started 18 months ago, I’ve met with more than 400 business and government leaders across the globe. Those conversations have reinforced my strong sense that, despite a certain amount of frustration on each side, the two groups share the belief that capitalism has been and can continue to be the greatest engine of prosperity ever devised—and that we will need it to be at the top of its job-creating, wealth-generating game in the years to come. At the same time, there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.

Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about changing how we view business’s value and its role in society.

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.

When making major decisions, Asians typically think in terms of at least 10 to 15 years. In the U.S. and Europe, nearsightedness is the norm.

None of these ideas, or the specific proposals that follow, are new. What is new is the urgency of the challenge. Business leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public. The good news is that the reforms will not only increase trust in the system; they will also strengthen the system itself. They will unleash the innovation needed to tackle the world’s grand challenges, pave the way for a new era of shared prosperity, and restore public faith in business.

1. Fight the Tyranny of Short-Termism

As a Canadian who for 25 years has counseled business, public sector, and nonprofit leaders across the globe (I’ve lived in Toronto, Sydney, Seoul, Shanghai, and now London), I’ve had a privileged glimpse into different societies’ values and how leaders in various cultures think. In my view, the most striking difference between East and West is the time frame leaders consider when making major decisions. Asians typically think in terms of at least 10 to 15 years. For example, in my discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up with a 60-year view of his country’s future (though we settled for producing a study called National Vision 2020.) In the U.S. and Europe, nearsightedness is the norm. I believe that having a long-term perspective is the competitive advantage of many Asian economies and businesses today.

Myopia plagues Western institutions in every sector. In business, the mania over quarterly earnings consumes extraordinary amounts of senior time and attention. Average CEO tenure has dropped from 10 to six years since 1995, even as the complexity and scale of firms have grown. In politics, democracies lurch from election to election, with candidates proffering dubious short-term panaceas while letting long-term woes in areas such as economic competitiveness, health, and education fester. Even philanthropy often exhibits a fetish for the short term and the new, with grantees expected to become self-sustaining in just a few years.

Lost in the frenzy is the notion that long-term thinking is essential for long-term success. Consider Toyota, whose journey to world-class manufacturing excellence was years in the making. Throughout the 1950s and 1960s it endured low to nonexistent sales in the U.S.—and it even stopped exporting altogether for one bleak four-year period—before finally emerging in the following decades as a global leader. Think of Hyundai, which experienced quality problems in the late 1990s but made a comeback by reengineering its cars for long-term value—a strategy exemplified by its unprecedented introduction, in 1999, of a 10-year car warranty. That radical move, viewed by some observers as a formula for disaster, helped Hyundai quadruple U.S. sales in three years and paved the way for its surprising entry into the luxury market.

To be sure, long-term perspectives can be found in the West as well. For example, in 1985, in the face of fierce Japanese competition, Intel famously decided to abandon its core business, memory chips, and focus on the then-emerging business of microprocessors. This “wrenching” decision was “nearly inconceivable” at the time, says Andy Grove, who was then the company’s president. Yet by making it, Intel emerged in a few years on top of a new multi-billion-dollar industry. Apple represents another case in point. The iPod, released in 2001, sold just 400,000 units in its first year, during which Apple’s share price fell by roughly 25%. But the board took the long view. By late 2009 the company had sold 220 million iPods—and revolutionized the music business.

It’s fair to say, however, that such stories are countercultural. In the 1970s the average holding period for U.S. equities was about seven years; now it’s more like seven months. According to a recent paper by Andrew Haldane, of the Bank of England, such churning has made markets far more volatile and produced yawning gaps between corporations’ market price and their actual value. Then there are the “hyperspeed” traders (some of whom hold stocks for only a few seconds), who now account for 70% of all U.S. equities trading, by one estimate. In response to these trends, executives must do a better job of filtering input, and should give more weight to the views of investors with a longer-term, buy-and-hold orientation.

If they don’t, short-term capital will beget short-term management through a natural chain of incentives and influence. If CEOs miss their quarterly earnings targets, some big investors agitate for their removal. As a result, CEOs and their top teams work overtime to meet those targets. The unintended upshot is that they manage for only a small portion of their firm’s value. When McKinsey’s finance experts deconstruct the value expectations embedded in share prices, we typically find that 70% to 90% of a company’s value is related to cash flows expected three or more years out. If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem.

Roughly 70% of all U.S. equities trading is now done by “hyperspeed” traders—some of whom hold stocks for only a few seconds.

Some rightly resist playing this game. Unilever, Coca-Cola, and Ford, to name just a few, have stopped issuing earnings guidance altogether. Google never did. IBM has created five-year road maps to encourage investors to focus more on whether it will reach its long-term earnings targets than on whether it exceeds or misses this quarter’s target by a few pennies. “I can easily make my numbers by cutting SG&A or R&D, but then we wouldn’t get the innovations we need,” IBM’s CEO, Sam Palmisano, told us recently. Mark Wiseman, executive vice president at the Canada Pension Plan Investment Board, advocates investing “for the next quarter century,” not the next quarter. And Warren Buffett has quipped that his ideal holding period is “forever.” Still, these remain admirable exceptions.

To break free of the tyranny of short-termism, we must start with those who provide capital. Taken together, pension funds, insurance companies, mutual funds, and sovereign wealth funds hold $65 trillion, or roughly 35% of the world’s financial assets. If these players focus too much attention on the short term, capitalism as a whole will, too.

In theory they shouldn’t, because the beneficiaries of these funds have an obvious interest in long-term value creation. But although today’s standard practices arose from the desire to have a defensible, measurable approach to portfolio management, they have ended up encouraging shortsightedness. Fund trustees, often advised by investment consultants, assess their money managers’ performance relative to benchmark indices and offer only short-term contracts. Those managers’ compensation is linked to the amount of assets they manage, which typically rises when short-term performance is strong. Not surprisingly, then, money managers focus on such performance—and pass this emphasis along to the companies in which they invest. And so it goes, on down the line.

Only 45% of those surveyed in the U.S. and the UK expressed trust in business. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil.

As the stewardship advocate Simon Wong points out, under the current system pension funds deem an asset manager who returns 10% to have underperformed if the relevant benchmark index rises by 12%. Would it be unthinkable for institutional investors instead to live with absolute gains on the (perfectly healthy) order of 10%—especially if they like the approach that delivered those gains—and review performance every three or five years, instead of dropping the 10-percenter? Might these big funds set targets for the number of holdings and rates of turnover, at least within the “fundamental investing” portion of their portfolios, and more aggressively monitor those targets? More radically, might they end the practice of holding thousands of stocks and achieve the benefits of diversification with fewer than a hundred—thereby increasing their capacity to effectively engage with the businesses they own and improve long-term performance? Finally, could institutional investors beef up their internal skills and staff to better execute such an agenda? These are the kinds of questions we need to address if we want to align capital’s interests more closely with capitalism’s.

2. Serve Stakeholders, Enrich Shareholders

The second imperative for renewing capitalism is disseminating the idea that serving stakeholders is essential to maximizing corporate value. Too often these aims are presented as being in tension: You’re either a champion of shareholder value or you’re a fan of the stakeholders. This is a false choice.

The inspiration for shareholder-value maximization, an idea that took hold in the 1970s and 1980s, was reasonable: Without some overarching financial goal with which to guide and gauge a firm’s performance, critics feared, managers could divert corporate resources to serve their own interests rather than the owners’. In fact, in the absence of concrete targets, management might become an exercise in politics and stakeholder engagement an excuse for inefficiency. Although this thinking was quickly caricatured in popular culture as the doctrine of “greed is good,” and was further tarnished by some companies’ destructive practices in its name, in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of value maximization have always insisted that it is long-term value that has to be maximized.

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments. “The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

Smith’s insight into the profound interdependence between business and society, and how that interdependence relates to long-term value creation, still reverberates. In 2008 and again in 2010, McKinsey surveyed nearly 2,000 executives and investors; more than 75% said that environmental, social, and governance (ESG) initiatives create corporate value in the long term. Companies that bring a real stakeholder perspective into corporate strategy can generate tangible value even sooner. (See the sidebar “Who’s Getting It Right?”)

Creating direct business value, however, is not the only or even the strongest argument for taking a societal perspective. Capitalism depends on public trust for its legitimacy and its very survival. According to the Edelman public relations agency’s just-released 2011 Trust Barometer, trust in business in the U.S. and the UK (although up from mid-crisis record lows) is only in the vicinity of 45%. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil. The picture is equally bleak for individual corporations in the Anglo-American world, “which saw their trust rankings drop again last year to near-crisis lows,” says Richard Edelman.

How can business leaders restore the public’s trust? Many Western executives find that nothing in their careers has prepared them for this new challenge. Lee Scott, Walmart’s former CEO, has been refreshingly candid about arriving in the top job with a serious blind spot. He was plenty busy minding the store, he says, and had little feel for the need to engage as a statesman with groups that expected something more from the world’s largest company. Fortunately, Scott was a fast learner, and Walmart has become a leader in environmental and health care issues.

Tomorrow’s CEOs will have to be, in Joseph Nye’s apt phrase, “tri-sector athletes”: able and experienced in business, government, and the social sector. But the pervading mind-set gets in the way of building those leadership and management muscles. “Analysts and investors are focused on the short term,” one executive told me recently. “They believe social initiatives don’t create value in the near term.” In other words, although a large majority of executives believe that social initiatives create value in the long term, they don’t act on this belief, out of fear that financial markets might frown. Getting capital more aligned with capitalism should help businesses enrich shareholders by better serving stakeholders.

3. Act Like You Own the Place

As the financial sector’s troubles vividly exposed, when ownership is broadly fragmented, no one acts like he’s in charge. Boards, as they currently operate, don’t begin to serve as a sufficient proxy. All the Devils Are Here, by Bethany McLean and Joe Nocera, describes how little awareness Merrill Lynch’s board had of the firm’s soaring exposure to subprime mortgage instruments until it was too late. “I actually don’t think risk management failed,” Larry Fink, the CEO of the investment firm BlackRock, said during a 2009 debate about the future of capitalism, sponsored by the Financial Times. “I think corporate governance failed, because…the boards didn’t ask the right questions.”

What McKinsey has learned from studying successful family-owned companies suggests a way forward: The most effective ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure helps provide) with a significant, committed, long-term owner. Most large public companies, however, have extremely dispersed ownership, and boards rarely perform the single-owner-proxy role. As a result, CEOs too often listen to the investors (and members of the media) who make the most noise. Unfortunately, those parties tend to be the most nearsighted ones. And so the tyranny of the short term is reinforced.

The answer is to renew corporate governance by rooting it in committed owners and by giving those owners effective mechanisms with which to influence management. We call this ownership-based governance, and it requires three things:

Just 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles.

More-effective boards.

In the absence of a dominant shareholder (and many times when there is one), the board must represent a firm’s owners and serve as the agent of long-term value creation. Even among family firms, the executives of the top-performing companies wield their influence through the board. But only 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles. A government-commissioned review of the governance of British banks last year recommended an enormous increase in the time required of nonexecutive directors of banks—from the current average, between 12 and 20 days annually, to between 30 and 36 days annually. What’s especially needed is an increase in the informal time board members spend with investors and executives. The nonexecutive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to the company’s business, and 70% of that time consists of informal meetings and conversations. Four to five days a month obviously give a board member much greater understanding and impact than the three days a quarter (of which two may be spent in transit) devoted by the typical board member of a public company.

Boards also need much more relevant experience. Industry knowledge—which four of five nonexecutive directors of big companies lack—helps boards identify immediate opportunities and reduce risk. Contextual knowledge about the development path of an industry—for example, whether the industry is facing consolidation, disruption from new technologies, or increased regulation—is highly valuable, too. Such insight is often obtained from experience with other industries that have undergone a similar evolution.

In addition, boards need more-effective committee structures—obtainable through, for example, the establishment of a strategy committee or of dedicated committees for large business units. Directors also need the resources to allow them to form independent views on strategy, risk, and performance (perhaps by having a small analytical staff that reports only to them). This agenda implies a certain professionalization of nonexecutive directorships and a more meaningful strategic partnership between boards and top management. It may not please some executive teams accustomed to boards they can easily “manage.” But given the failures of governance to date, it is a necessary change.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to the decline in public esteem for business.

Companies should create real risk for executives.Some experts privately suggest mandating that new executives invest a year’s salary in the company.

CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior. When short-dated, options lead to a focus on meeting quarterly earnings estimates; even when long-dated (those that vest after three years or more), they can reward managers for simply surfing industry- or economy-wide trends (although reviewing performance against an appropriate peer index can help minimize free rides). Moreover, few compensation schemes carry consequences for failure—something that became clear during the financial crisis, when many of the leaders of failed institutions retired as wealthy people.

There will never be a one-size-fits-all solution to this complex issue, but companies should push for change in three key areas:

• They should link compensation to the fundamental drivers of long-term value, such as innovation and efficiency, not just to share price.

• They should extend the time frame for executive evaluations—for example, using rolling three-year performance evaluations, or requiring five-year plans and tracking performance relative to plan. This would, of course, require an effective board that is engaged in strategy formation.

• They should create real downside risk for executives, perhaps by requiring them to put some skin in the game. Some experts we’ve surveyed have privately suggested mandating that new executives invest a year’s salary in the company.

Redefined shareholder “democracy.”

The huge increase in equity churn in recent decades has spawned an anomaly of governance: At any annual meeting, a large number of those voting may soon no longer be shareholders. The advent of high-frequency trading will only worsen this trend. High churn rates, short holding periods, and vote-buying practices may mean the demise of the “one share, one vote” principle of governance, at least in some circumstances. Indeed, many large, top-performing companies, such as Google, have never adhered to it. Maybe it’s time for new rules that would give greater weight to long-term owners, like the rule in some French companies that gives two votes to shares held longer than a year. Or maybe it would make sense to assign voting rights based on the average turnover of an investor’s portfolio. If we want capitalism to focus on the long term, updating our notions of shareholder democracy in such ways will soon seem less like heresy and more like common sense.

While I remain convinced that capitalism is the economic system best suited to advancing the human condition, I’m equally persuaded that it must be renewed, both to deal with the stresses and volatility ahead and to restore business’s standing as a force for good, worthy of the public’s trust. The deficiencies of the quarterly capitalism of the past few decades were not deficiencies in capitalism itself—just in that particular variant. By rebuilding capitalism for the long term, we can make it stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs. The three imperatives outlined above can be a start along this path and, I hope, a way to launch the conversation; others will have their own ideas to add.

The kind of deep-seated, systemic changes I’m calling for can be achieved only if boards, business executives, and investors around the world take responsibility for bettering the system they lead. Such changes will not be easy; they are bound to encounter resistance, and business leaders today have more than enough to do just to keep their companies running well. We must make the effort regardless. If capitalism emerges from the crisis vibrant and renewed, future generations will thank us. But if we merely paper over the cracks and return to our precrisis views, we will not want to read what the historians of the future will write. The time to reflect—and to act—is now.

 

Please see my other related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

 

Key sources of Research:

Secular stagnation and low investment: Breaking the vicious cycle—a discussion paper

McKinsey

http://www.mckinsey.com/global-themes/europe/secular-stagnation-and-low-investment-breaking-the-vicious-cycle

Case Still Out on Whether Corporate Short-Termism Is a Problem

Larry Summers

http://larrysummers.com/2017/02/09/case-still-out-on-whether-corporate-short-termism-is-a-problem/

Where companies with a long-term view outperform their peers

McKinsey

http://www.mckinsey.com/global-themes/long-term-capitalism/where-companies-with-a-long-term-view-outperform-their-peers

How short-term thinking hampers long-term economic growth

FT

https://www.ft.com/content/8c868a98-b821-11e4-b6a5-00144feab7de

Anthony Hilton: Short-term thinking hits nations as a whole, not just big business

http://www.standard.co.uk/comment/comment/anthony-hilton-short-term-thinking-hits-nations-as-a-whole-not-just-big-business-10427294.html

Short-termism in business: causes, mechanisms and consequences

EY Poland Report

http://www.ey.com/Publication/vwLUAssets/EY_Poland_Report/$FILE/Short-termism_raport_EY.pdf

Overcoming the Barriers to Long-term Thinking in Financial Markets

Ruth Curran and Alice Chapple
Forum for the Future

https://www.forumforthefuture.org/sites/default/files/project/downloads/long-term-thinking-fpf-report-july-11.pdf

Understanding Short-Termism: Questions and Consequences

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Understanding-Short-Termism.pdf

Ending Short-Termism : An Investment Agenda for Growth

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Ending-Short-Termism.pdf

The Short Long

Speech by
Andrew G Haldane, Executive Director, Financial Stability, and Richard Davies

Brussels May 2011

http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech495.pdf

Capitalism for the Long Term

Dominic Barton

From the March 2011 Issue

https://hbr.org/2011/03/capitalism-for-the-long-term

Quarterly capitalism: The pervasive effects of short-termism and austerity

https://currentlyunderdevelopment.wordpress.com/2016/05/10/quarterly-capitalism-the-pervasive-effects-of-short-termism-and-austerity/

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

http://www.wlrk.com/docs/IsShortTermBehaviorJeopardizingTheFutureProsperityOfBusiness_CEOStrategicimplications.pdf

Andrew G Haldane: The short long

Speech by Mr Andrew Haldane, Executive Director, Financial Stability, and Mr Richard
Davies, Economist, Financial Institutions Division, Bank of England,
at the 29th Société
Universitaire Européene de Recherches Financières Colloquium,
Brussels, 11 May 2011

http://www.bis.org/review/r110511e.pdf

THE UNEASY CASE FOR FAVORING LONG-TERM SHAREHOLDERS

Jesse M. Fried

https://dash.harvard.edu/bitstream/handle/1/17985223/Fried_795.pdf?sequence=1

The fringe economic theory that might get traction in the 2016 campaign

https://www.washingtonpost.com/news/wonk/wp/2015/03/02/the-fringe-economic-theory-that-might-get-traction-in-the-2016-campaign/?utm_term=.932bc0b97758

FCLT Global:  Focusing Capital on the Long Term

Publications

http://www.fcltglobal.org/insights/publications

Finally, Evidence That Managing for the Long Term Pays Off

Dominic Barton

James Manyika

Sarah Keohane Williamson

February 07, 2017 UPDATED February 09, 2017

https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

Focusing Capital on the Long Term

Dominic Barton

Mark Wiseman

From the January–February 2014 Issue

Is Corporate Short-Termism Really a Problem? The Jury’s Still Out

Lawrence H. Summers

February 16, 2017

Yes, Short-Termism Really Is a Problem

Roger L. Martin

October 09, 2015

Long-Termism or Lemons

The Role of Public Policy in Promoting Long-Term Investments

By Marc Jarsulic, Brendan V. Duke, and Michael Madowitz October 2015

Center for American Progress

https://cdn.americanprogress.org/wp-content/uploads/2015/10/21060054/LongTermism-reportB.pdf

 

Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

https://corpgov.law.harvard.edu/2009/09/11/overcoming-short-termism-a-call-for-a-more-responsible-approach-to-investment-and-business-management/

 

 

Focusing capital on the Long Term

Jean-Hugues Monier – Senior Parter – McKinsey & Company

Princeton University – November 2016

http://jrc.princeton.edu/sites/jrc/files/jean-hugues_j._monier_slides_final.pdf

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Clock of the Long Now: Time and Responsibility

Clock of the Long Now: Time and Responsibility

 

Stewart Brand is one of my Hero.  I admire his work and have deep respect for him.

Check out his books:

  • The Media Lab
  • Whole Earth Discipline
  • How Buildings Learn
  • Clock of the Long Now

Stewart Brand and his associates are building a 10000 yr clock in west Texas.  Project is funded by Jeff Bezos.  Danny Hillis is one of the designer of the clock.  Prototypes of clock are in display in Museums in UK and here in USA.

Stewart Brand work is about promoting long term thinking—Very Long Term Thinking.  What we call long term in our day to day conversation is just Now a days in context of Long Term Thinking being promoted by Stewart Brand.

Long Now thinking would be considered equal to thinking associated with climate cycles time scales such as Milankovitch Cycles.

You can check out current status of the clock and other projects of the Long Now Foundation at its website.

  • How should Humans live and behave in context of Long Term Thinking?
  • How should the information, knowledge, culture, artifacts, languages, species, ecology be preserved?
  • What kind of world are we creating for future generations?
  • What should be preserved?
  • How should it be preserved?
  • How would people after 10000 years extract information contained in preserved objects?

These are big and deep questions?  We need philosophers like Stewart Brand to guide us.

I am ready to learn from him and other visionaries like him.

 

Time Horizon – Short to Very Long Term

  • Now – 3 Days
  • Now a days – 30 years
  • Long Now – 20000 years

 

Types of Cycles – slow moving to fast moving

  • Nature
  • Culture
  • Governance
  • Infrastructure
  • Commerce
  • Fashion

 

Image of Long Now Time

layersoftime-simplnew

 

LongNowDiag

 

Key Sources of Researches:

 

Whole Earth comes into focus

To understand how our planet uses energy, we must integrate genetic data from microbial studies with satellite views of our planet.

 

Stewart Brand

 

https://pdfs.semanticscholar.org/e2df/859231b770b7370c630252e3d04867fa6b9a.pdf

 

 

An Architecture of the Whole

University of California, Davis

 

http://arts.berkeley.edu/wp-content/uploads/2016/01/arc-of-life-Sadler-.pdf

 

 

ECOLOGICAL FUTURES: BUILDING AN ECOLOGY OF THE LONG NOW

STEPHEN R. CARPENTER

 

http://esa.org/history/Awards/papers/Carpenter_SR_MA.pdf

 

 

“THE CLOCK OF THE LONG NOW”
A Talk with Stewart Brand

https://www.edge.org/documents/archive/edge46.html

 

 

The Clock in the Mountain

2011

http://kk.org/thetechnium/the-clock-in-th/

 

 

How to Make a Clock Run for 10,000 Years

2011

https://www.wired.com/2011/06/10000-year-clock/all/1

 

 

TIME IN THE 10,000-YEAR CLOCK

Danny Hillis, Rob Seaman, Steve Allen, and Jon Giorgini

 

https://arxiv.org/ftp/arxiv/papers/1112/1112.3004.pdf

 

 

Stewart Brand: The Long Now

 

 

 

The Long Now Foundation

http://longnow.org/clock/

 

 

There’s a Massive 10,000 Year Clock Being Built in a West Texas Mountain

BY ELIZABETH ABRAHAMSEN

2016

http://www.wideopencountry.com/there-is-a-10000-year-clock-under-construction-in-west-texas/

Art of Long View: Future, Uncertainty and Scenario Planning

Art of Long View: Future, Uncertainty and Scenario Planning

 

Key Concepts:

  • Fundamental Uncertainty
  • Knightian Uncertainty
  • Long term Thinking
  • Possibility Space
  • Probabilistic Space
  • Plausibility
  • Anticipation
  • Strategic Conversations
  • Strategic Narratives
  • Strategic Scenarios
  • Normative Scenarios
  • Causal Layered Analysis
  • Strategic Learning
  • Integral Futures
  • Multiple Futures
  • Multiple Horizons

 

Key People:

  • Peter Schwartz
  • Stewart Brand
  • Jay Ogilvy
  • Kees Van Der Heijden
  • Michel Godet
  • Pierre Wack
  • Herman Kahn
  • P J H Schoemaker
  • Arie De Gues
  • Napier Collyns
  • Eric Best
  • Art Kleiner
  • Thomas J Chermack
  • Gill Ringland
  • Angela Wilkinson
  • Adam Kahane
  • Ged Davis
  • Russell Ackoff
  • Jay Forrester
  • Peter Senge
  • Andy Hines
  • Peter Bishop
  • R Slaughter
  • Sohail Inayatullah
  • Rafael Ramirez
  • Roberto Poli
  • Riel Miller
  • George Wright
  • Eamonn Kelly
  • Katherine Fulton

 

From How plausibility-based scenario practices are grappling with complexity to appreciate and address 21st century challenges

The tighter interconnections of natural, social and economic systems lead to increased uncertainty and greater complexity. The growing list of today’s significant concerns, whether focused on fixing the financial crisis or progressing socio-ecological sustainability highlights the urgency to look forward and manage large scale, system transformations [1] and challenges the conventional western economic wisdom of continuous, linear or exponential growth. Failure to engage with irreducible uncertainty is more widely appreciated and attempts to tame uncertainty can make matters worse [2].

Scenarios were introduced over 50 years ago as a means to overcome the limits of linear, reductionist and deterministic thinking that underpinned the then dominant practices of forecast-based planning. Scenario builders reject the notion of wholly predictable futures and instead seek to construct alternative futures which explore not only the paths to each, but do so in a way that emphasizes the need to attend to disruptive change as normal. Scenarios work is conducted in different sectors – public, private, civil and academia – and for a wide range of purposes, such as learning [7], strategy [8], or conflict avoidance [9].

Scenario practices have evolved from a “hypothetical sequencing of events constructed with the purpose of focusing attention on causal structures and decision points” [10] to attendance to the dynamic interactions that create disruptive and turbulent change as organizations co-evolve with their wider contexts [11]. At the same time, continuous innovation and diversity of scenario practices result in methodological confusions and misunderstandings [12]. To avoid contributing to further confusion we first define and then justify our interest in one particular tradition of practice.

Bradfield et al. [13] highlight three different scenario ‘schools’. In this paper we focus on what those authors refer to as Intuitive Logics, with its emphasis on plausible alternative futures, in contrast with the normative French School and the probabilistic USA School. Our choice to focus on the intuitive logics school is justified by evidence of its growing dominance in non-probabilistic scenario work [14].

Schoemaker [15] describes how plausibility-based scenarios are useful approaches in situations characterized by increasing uncertainty and complexity. He notes the effectiveness of scenarios as a psychological basis for addressing biases due to cognitive limits and overcoming ‘group think’ resulting from consensus building processes in social organizations.

In the intuitive logics tradition, the future is a fiction. Scenarios are ‘open stories’ [16] and stories and storytelling are deployed as a means to engage intuition, expose deeply held assumptions and forge new and shared interpretative frames. The assumption is that the emerging future cannot be forecasted but can be imagined and “lived in” and offers a different perspective to learning about the present than history alone provides. In effect, plausibility-based scenarios offer reframing devices rather than forecasting tools [17,18]. Scenarios are not populated with facts but with perceptions, assumptions and expectations.

Quality of a good scenario is not determined by its predictive accuracy but by its impact which can be evaluated in different ways — cognitive shift, enhancing judgment, leading to more and better strategic options and/or motivating change [19].

Despite the extensive and continued use of intuitive logics scenarios in the public and private sectors, the diversity of methods can lead to a wholesale dismissal of these practices by empiricist traditions of inquiry and evidence-based decision making cultures [20,21]. At the same time organizations, such as Shell, which have sustained the practice of plausibility-based, intuitive logics scenarios for over 50 years, appreciate the added value in terms of enabling decision makers to engage with uncertainty, enabling systemic insights and contributing to the adaptive capacity of the firm [21].

In contrast with the objectivist and positivist ontologies of probabilistic scenario practices, constructivism, nominalism and post-normal science are the mainstays of the plausibility-based, intuitive logics tradition [10,12,48,49]. As Burrell and Morgan [50] noted, a realist sees the nature of reality as ‘out there’, hard and concrete, while the nominalist sees the social world as the result of individual cognition and made up of names, labels and concepts. Wilkinson and Eidinow [12] note the objectivist– constructivist dichotomy between probable and plausible scenario traditions. Scenarios are pragmatic rather than positivistic: events and behaviors are explained from the perspective of the individuals involved and thus reflect equally valid understandings from multiple points in a system. A central challenge is thus to navigate plurality [51] (Table 1).

For many complexity practitioners, the science of multi- level interconnected systems is extending the boundary of uncertainty where quantitative analysis is applicable. Agent- based modeling is one of the new techniques being used to undertake quantitative assessment of the probability of the collapse of system resilience [52], enabling a statistical forecast of the transition between various regimes of the system. Such approach proved relevant in addressing in- stabilities in financial markets and the role of contagion of norms as proposed by Axelrod [53], or Gintis [54] in the reframing obesity as an epidemic [55] rather than induced by the marketing of dubious foods.

Paul Cilliers [56] reflects on the ontology of complexity as follows: “The argument from complexity thus wants to move beyond the objective/subjective dichotomy”. He goes on to say that complexity science is in some ways an extension of the traditional scientific approach, but the ontological issues are shifted to the problem of boundaries. Since complex systems are open systems that interact with other systems, the choice of boundary is arbitrary. He quotes the notion of ‘operational closure’ as a useful approach, rooted in pragmatism. The uncertainty on the state of the system in the future is therefore objectively bound by formal mathematical modeling, but at the same time subjectively framed through the (explicit or implicit) choices concerning critical systems heuristics e.g. definition of the system boundaries.

 

 

Key Sources of Research:

 

Scenario Planning and Strategic Forecasting

Jay Ogilvy

http://www.forbes.com/sites/stratfor/2015/01/08/scenario-planning-and-strategic-forecasting/print/

 

Living in the futures

Angela Wilkinson

https://hbr.org/2013/05/living-in-the-futures

 

Scenarios: Uncharted Waters Ahead

Pierre Wack

https://hbr.org/1985/09/scenarios-uncharted-waters-ahead

 

Scenarios: Shooting the Rapids

Pierre Wack

https://hbr.org/1985/11/scenarios-shooting-the-rapids/ar/1

 

Planning As Learning

https://hbr.org/1988/03/planning-as-learning&cm_sp=Article-_-Links-_-End%20of%20Page%20Recirculation

 

The Living Company

https://hbr.org/1997/03/the-living-company

 

The Use and Misuse of Scenarios

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios

 

Scenario Planning

http://www.economist.com/node/12000755

 

WHAT IF? The Art of Scenario Thinking for Nonprofits

 

http://monitorinstitute.com/downloads/what-we-think/what-if/What_If.pdf

 

Shell Scenarios

http://www.shell.com/energy-and-innovation/the-energy-future/scenarios.html

 

A Review of Scenario Planning Literature

https://scienceimpact.mit.edu/sites/default/files/documents/Scenario%20PlanningA%20Review%20of%20the%20Literature.PDF

 

The origins and evolution of scenario techniques in long range business planning

Ron Bradfielda, George Wrightb, George Burt, George Cairns, Kees Van Der Heijden

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.322.703&rep=rep1&type=pdf

 

Directions in Scenario Planning Literature – A Review of the Past Decades

Celeste Amorim Varuma, Carla Melo

 

https://www.researchgate.net/profile/Celeste_Varum/publication/229173845_Directions_in_scenario_planning_literature__A_review_of_the_past_decades/links/0a85e53c946a22d99c000000.pdf

 

A review of scenario planning

 

Muhammad Amer, Tugrul U. Daim *, Antonie Jetter

2012

 

https://www.researchgate.net/profile/Muhammad_Amer8/publication/256712985_A_review_of_scenario_planning._Futures/links/53dbe98c0cf2a76fb667b0b3.pdf

 

The current state of scenario development: an overview of techniques

Peter Bishop, Andy Hines and Terry Collins

 

https://nctc.fws.gov/courses/alc/alc3194/resources/publications/scenario-planning/Bishop_et_al_2007.pdf

 

Integrating organizational networks, weak signals, strategic radars and scenario planning

Paul J.H. Schoemaker ⁎, George S. Day, Scott A. Snyder

https://www.researchgate.net/profile/Paul_Schoemaker/publication/256859401_Integrating_organizational_networks_weak_signals_strategic_radars_and_scenario_planning/links/0a85e5352fd617b0f6000000.pdf

 

Advantages and disadvantages of scenario approaches for strategic foresight

Dana Mietzner and Guido Reger

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.464.3984&rep=rep1&type=pdf

 

PLAUSIBILITY AND PROBABILITY IN SCENARIO PLANNING

 

Rafael Ramirez  & Cynthia Selin

 

http://eureka.sbs.ox.ac.uk/4754/1/ACCEPTED__Plausibility_and_Probability_in_Scenario_Planning_March_24_2013.pdf

 

Scenario building: Uses and abuses

Philippe Durance, Michel Godet

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.663.568&rep=rep1&type=pdf

 

The Role of System Theory in Scenario Planning

 

Thomas Chermack

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.529.95&rep=rep1&type=pdf

 

The Art of Scenarios and Strategic Planning: Tools and Pitfalls

MICHEL GODET

http://en.laprospective.fr/dyn/anglais/articles/art_of_scenarios.pdf

 

A Scenario-based Approach to Strategic Planning – Integrating Planning and Process Perspective of Strategy

Torsten Wulf, Philip Meißner, Stephan Stubner

 

https://www.researchgate.net/profile/Philip_Meissner/publication/267786604_A_Scenario-based_Approach_to_Strategic_Planning__Integrating_Planning_and_Process_Perspective_of_Strategy/links/553b7c780cf2c415bb093eb0.pdf

 

An Introduction to the Ontology of Anticipation

Roberto Poli

 

http://cspo.org/wp-content/uploads/2014/11/read_Poli-An-Introduction-to-the-Ontology-of-Anticipation.pdf

 

Being Without Existing: The Futures Community at a Turning Point? A Comment on Jay Ogilvy’s “Facing the Fold”

By Riel Miller

https://www.researchgate.net/profile/Riel_Miller2/publication/243995158_Being_without_existing_the_futures_community_at_a_turning_point_A_comment_on_Jay_Ogilvy’s_Facing_the_fold/links/53f70d4d0cf22be01c452fae.pdf

 

Riel Miller, Roberto Poli and Pierre Rossel

The Discipline of Anticipation: Exploring Key Issues

 

 

Towards an ontology of the present moment

 

Anthony Hodgson

 

Augmenting the intuitive logics scenario planning method for a more comprehensive analysis of causation

James Derbyshire , George Wright

http://www.sciencedirect.com/science/article/pii/S0169207016300152

 

Plotting Your Scenarios

Jay Ogilvy and Peter Schwartz

http://www.meadowlark.co/plotting_your_scenarios.pdf

 

When and How to Use Scenario Planning: A Heuristic Approach with Illustration

Paul J.H. Schoemaker

https://www.researchgate.net/profile/Paul_Schoemaker/publication/220040372_When_and_How_to_Use_Scenario_Planning_A_Heuristic_Approach_with_Illustration/links/0c9605325c140d52e9000000.pdf

 

Futures literacy: A hybrid strategic scenario method

Riel Miller

https://www.researchgate.net/profile/Riel_Miller2/publication/222053294_Futures_literacy_A_hybrid_strategic_scenario_method._Futures_39_341-362/links/54783ef50cf293e2da287b54.pdf

 

From Forecasting and Scenarios to Social Construction: Changing Methodological Paradigms in Futures Studies

Richard A. Slaughter

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.9425&rep=rep1&type=pdf

 

Developing and Applying Strategic Foresight

Richard A. Slaughter

http://www.forschungsnetzwerk.at/downloadpub/2002slaughter_Strategic_Foresight.pdf

 

 

What difference does ‘integral’ make?

Richard A. Slaughter

http://integralfutures.com/wordpress/wpcontent/uploads/2011/10/What_Diff_Integral.pdf

 

Framework foresight: Exploring futures the Houston way

Andy Hines , Peter C. Bishop

http://www.andyhinesight.com/wp-content/uploads/2016/03/93-Framework-Foresight.pdf

 

BRINGING FORESIGHT INTO SYSTEMS THINKING – A THREE HORIZONS APPROACH –

Anthony Hodgson and Gerald Midgley

http://journals.isss.org/index.php/proceedings58th/article/viewFile/2278/770

 

Seeing in Multiple Horizons: Connecting Futures to Strategy

Andrew Curry

Anthony Hodgson

 

http://networkingaction.net/wp-content/uploads/Curry-three-time-horizons.pdf

 

Introduction to Strategic Foresight : A Resource Bibliography

Dr. Peter Bishop

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.731.952&rep=rep1&type=pdf

 

40 Years of Shell Scenarios

Shell International

http://s05.static-shell.com/content/dam/shell-new/local/corporate/corporate/downloads/pdf/shell-scenarios-40yearsbook080213.pdf

 

Scenarios as a Tool for the 21st Century

Ged Davis

Shell International

 

https://www.pik-potsdam.de/avec/peyresq2005/talks/0921/leemans/literature/davis_how_does_shell_do_scenarios.pdf

 

The Evolution of Integral Futures: A Status Update

Terry Collins & Andy Hines

 

http://integralfutures.com/wordpress/wp-content/uploads/2011/10/Collins_Hines_Evo_of_Integral_Futs_2011.pdf

 

integral futures

by Richard A. Slaughter

http://integralfutures.com/wordpress/wp-content/uploads/2011/10/Integral_Futures_APF_Overview_2012.pdf

 

Six pillars: futures thinking for transforming

Sohail Inayatullah

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.510.9662&rep=rep1&type=pdf

 

How plausibility-based scenario practices are grappling with complexity to appreciate and address 21st century challenges

Angela Wilkinson, Roland Kupers , Diana Mangalagiu

http://www.rolandkupers.com/wp/wp-content/uploads/2013/06/Link-16.pdf

 

Scenario Method: Current developments in theory and practice

Technological Forecasting and Social Change

Volume 80, Issue 4, Pages 561-838 (May 2013)

Edited by George Wright, George Cairns and Ron Bradfield

http://www.sciencedirect.com/science/journal/00401625/80/4