Managing for the Long Term Pays Off, Research Shows
Managing with a long-term view of your company in mind is the way to go, according to new research from McKinsey Global Institute in cooperation with FCLT Global. This study found that companies that operate with a true long-term mind-set have consistently outperformed industry peers since 2001 across almost every financial measure that matters, from revenue to profit.
The data for this index was drawn from 615 nonfinance companies that reported continuous results from 2001 to 2015, and whose market capitalization in that period had exceeded $5 billion in at least one year. To further ensure valid results and to avoid bias, the researchers evaluated all companies in the index only relative to their industry peers over several years, and conducted other tests and controls to ensure statistical robustness.
To construct its Corporate Horizon Index, McKinsey Global Institute identified five financial indicators. The indicators were chosen because they matched up with five hypotheses McKinsey had developed about the ways in which long- and short-term companies might differ. They are as follows:
- Investment: The assumption was that long-term companies will invest more and more consistently than others.
- Earnings quality: Earnings of long-term companies will rely less on accounting decisions and more on underlying cash flow than other companies.
- Margin growth: McKinsey Global Institute believed long-term companies are less likely to grow their margins unsustainably in order to hit near-term targets.
- Earnings growth: The team hypothesized that long-term companies will focus more on the absolute rise and fall of reported earnings, rather than being focused on hitting an earnings call.
- Quarterly targeting: Long-term companies are more likely to miss earnings targets by small amounts and less likely to hit earnings targets by small amounts.
According to the above financial indicators, Amazon.com, Unilever and AT&T are companies with a long-term mind-set, as evidenced by the charts below (the three companies identified for having a long-term mind-set are represented in blue).
As you can see, the differences between long-term thinking companies and all others are dramatic. Long-term focused companies, when compared to all other companies, have a 47 percent higher average company revenue; 36 percent higher average earning; 81 percent higher economic profit; and 58 percent higher average market capitalization.
McKinsey Global Institute calculated that the U.S. GDP could have grown by an additional $1 trillion if all companies managed for the long term. Five million more jobs would have been generated as well.
Therefore, don’t feel pressured to cut discretionary spending to avoid risking an earnings miss. Planning for the long-term success of your business will lead to stronger fundamentals and performance. Just ask Jeff Bezos and Amazon.com.
