Think of a corporation like a
human body. To be healthy, the body needs to take in sufficient and
appropriate nourishment, exercise, and avoid behaviours known to cause
disease and injury. Likewise, a corporation needs to 'invest' in
people, technology, infrastructure and innovation -- the nutrients of
business growth -- 'exercise' that investment to generate revenue, and
avoid the behaviours (bad decisions, bad acquisitions, letting the
competition inflict a beating on you) that lead to corporate 'illness'
and 'injury'.
By this analogy, the corporate model of the 1990s was the body-builder
-- investing heavily in food, and exercising to build muscle and
strength and speed and resilience. The catchwords of the day were
innovation, knowledge, human and intellectual capital. There was even
talk of a 'war for talent', an acknowledgement that bright, creative
people were so valuable that companies would fight over them.
Investments with long-term value are called assets, and the corporation of the 1990s generated wealth and growth by investing in assets.
By contrast, the corporate model of this decade is the dieter
-- staying healthy by eating as little as possible, spot-exercising and
using diuretics to reduce every visible ounce of fat, forgoing muscle
and strength and speed and resilience for the appearance
of health. The catchwords today are cost-management, outsourcing,
offshoring, and risk management. Focus is on short-term,
quarter-over-quarter bottom-line change, and the corporation of today generates wealth by eliminating costs.
Both mechanisms, carried to an extreme, are unhealthy. The body-builder
can cheat and create artificial 'assets' with steroids. Enron did
exactly that, puffing up its balance sheet with non-existent assets.
The dieter's extreme is called anorexia,
and it's an insidious and self-perpetuating disease. You lose weight,
and for awhile everyone tells you you look better. So you lose more,
and eventually you get obsessed with your weight, and then you reach a
wall where you can't lose any more, and it starts to affect your mind
so you can't function properly anymore. Then it gets worse.
I believe what we're seeing in the corporate world today is corporate anorexia. I described last week
the horrendous 9-step race-to-the-bottom that has driven corporations
to abandon quality, sacrifice domestic workers, and gouge and sue
customers in the never-ending, desperate attempt to keep in the good
books of insatiably demanding shareholders. You can see the unhappiness
in the faces of today's executives, and the weakness and vulnerability
of the depleted corporations that they lead in their financial
statements and forecasts. Meanwhile, fawning consultants, instead of
warning about the shortage of innovation, investment and long-term
strategy, are making excuses
for it. It's insane, it's unsustainable, it's bad for consumers,
workers and the economy, and it's irresponsible. You can no more cut
your way to corporate greatness than you can starve yourself to health.
The cure for corporate anorexia is as difficult as the cure for the
human illness. And as with the human illness, it's going to take a
'support group', people beside corporate managers who will be patient
and understanding as the patient at first may get sicker before they
get better. That means shareholders will have to abandon their absurdly
unrealistic expectations of perpetual double-digit profit growth, and
recognize that the real value of the stocks they hold is probably only
a quarter to a third what they're currently valued at -- a bitter pill
to swallow for which greedy brokerage firms also share responsibility.
It also means shareholders must learn to think, and assess their
investments, over the longer term. Innovation takes time to generate a
return, especially when many corporations are essentially starting from
zero -- much of today's R&D expenditures are spent on incremental
and copycat products that produce safe but paltry revenue improvement.
Innovation also entails risk, and that means spending money on ideas
that fail in order to learn and to generate the blockbuster successes
that draw on those failures, which in turn means some short-term
adverse earnings trends (which are currently brutally punished in the
marketplace). It also means deferring profits to build back the
infrastructure and 'muscle' that can once again start generating new
revenue from new products, new channels, quantum-leap process
improvements, new technologies and other true innovations.
While investors will need to be patient, the professions that advise
and monitor corporations and their management -- consultants,
investment analysts, accountants, and government agencies -- need to
take the lead and lay out a roadmap back to sustainable corporate
health, and explain it and 'sell it' to managers and investors.
- Consultants need to
stop apologizing for their clients' anorexic investment in innovation,
dig out the work they did a decade ago on the innovation process and
its business case, and start showing executives what needs to be done
and how to do it.
- Investment analysts
need to develop much longer-term horizons for forecasting and
evaluating public companies. The myopic focus on quarterly earnings,
and the absurd demand for steady, uninterrupted profit growth
short-changes companies that make long-term investments and think
ahead, and needs to be replaced with longer-term perspectives on
companies' ability to generate sustainable profits and earnings growth.
Some people have advocated eliminating quarterly earnings reports
entirely, which would be a good start. But analysts need to develop
models that will generate reliable
longer-term forecasts, based on an in-depth appreciation of a company's
ability to invest intelligently and realize a superior, measured return
on its investments, to create future wealth, managing risk and uncertainty as assets and not merely minimizing them as liabilities.
- Accountants need to develop new methods of assessing corporations' longer-term
health and viability, not just focus on increasingly convoluted and
meaningless measures of last year's 'paper profit'. These measures are
needed to inform investors, but more importantly they're needed to
guide management. We all need to get serious about the value of
intellectual, human, customer and social capital.
- Government needs to
use tax law to encourage longer-term investments in research and
innovation and to encourage corporations to take calculated risks and
strive for quantum improvements in products, processes and
technologies. Government also needs to work in partnership with
corporations to make joint investments in innovations that can produce
Future Wealth both for the company and for the society as a whole.
Corporations in turn need to be encouraged to 'get out more' and think
about ways they can make the world better, and governments can and must
offer incentives to do so, in return for a stake in the value of the
wealth created (not just a give-away to corporations). Unfortunately,
in countries like the US with near-bankrupt governments, this
assistance will have to take the form of manpower and intellectual
investment rather than financial incentives.
Recovering from a debilitating disease is a slow and difficult process,
especially when the patient is still in denial. But before Western
corporations infect the entire economy with anorexia -- as the current
wave of myopic downsizing, outsourcing and offshoring threatens to do
-- we need to recognize the illness for what it is, and start working
together to nurse the patient back to health.
(The Innovation Incubator pictured above is a service of my consultancy, Meeting of Minds)
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