Steve Odland is the President & CEO of the Committee for Economic Development, and the former Chairman & CEO of Office Depot, Inc., and AutoZone, Inc. He currently serves on the Boards of Directors of General Mills, Inc. and Analogic Corporation, is a Trustee of The Conference Board, a Senior Advisor to Peter J. Solomon Company, and is a Contributor to CNBC. He received his Bachelor of Business Administration from the University of Notre Dame, and a Master of Management degree from the Kellogg School of Management at Northwestern University.
In the last several years, battle lines have been drawn over what should be the primary focus of a corporation with regards to short-term market gains versus long-term value creation. Any executive management team or board of directors worth its salt recognizes that a balance of both is required to run a successful business. However, many corporate governance leaders have a growing concern that the focus on quarterly earnings and short-term gains in service of immediate shareholder return at the expense of a holistic, long-term strategy is tipping the balance too far in one direction.
One of these voices is Steve Odland, currently the CEO of the Committee for Economic Development (CED) and the former Chairman and CEO of Office Depot and AutoZone. He recently co-authored a book that addresses this very topic, entitled Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity. C-Suite had the chance to sit down with Odland and gain perspective on certain aspects of corporate culture—ones that he says pose a threat to capitalism’s long-term viability.
Editor’s Note: A short excerpt from the book follows the Q&A, courtesy of the authors.
Steve Odland: The planning began five years ago, when CED started outlining the celebration of its 75th anniversary. Capitalism is increasingly under fire. We are supposedly a prosperous nation, yet we’re living in an environment with stagnating incomes, a lack of upward mobility, and a crisis in terms of trust in business and the financial systems.
Historically, the system has garnered strong public support. Moreover, business has a track record of engaging with public officials to develop policies in the nation’s interest. But over the past 10 years, business leaders have kept their heads down for the most part. To sustain capitalism over the long run, we think business leaders need to make the case for free enterprise. They also need to reengage in the public square, which includes but is not limited to working with public officials to help lower the debt, reform regulation and fix health care. These are not independent political issues.
Our point of view is that capitalism wasn’t delivered to us on stone tablets—it developed as democracy developed and continues to evolve. In light of today’s challenges that threaten the system’s viability, business leaders need to work with public officials to make capitalism a long-term sustainable model.
Odland: Most of us who went to business school learned that our role was to develop shareholder value, and that is still true. But this shareholder-only model is misguided because there are many constituencies for the corporation to consider.
As a public company CEO, I developed that point of view on my own. To me, CEO also stands for “customers, employees and owners,” and the fact that you have to know and serve all your stakeholders. You can’t just focus on one individual. For example, if you only focused solely on employees, you’d pay them astronomically and you wouldn’t care about shareholders or customers.
This notion of short-termism aligns with the shareholder-centric model, analogous to eating the seed corn now rather than planting it for later. That leads to layoffs, less training, and lower long-term investment and innovation, among other consequences. It’s also why we’re seeing private companies invest at more than twice the rate of public companies. Co-author Joe Minarik and I really underscore the tie between long-term thinking and innovation. You can’t innovate on a short-term model.
I also think it’s important to give context to the whole notion of “short-term vs. long-term.” It’s not necessarily a specific period. For example, oil exploration often takes decades to play out. But social media marketing investments is a different story. The whole point here is to identify the tension between long-term, permanent investors in a stock and high-turnover traders.
Odland: Our view is that however you structure it, you have to incentivize long-term behavior. In the 1980s, there was an unintended consequence from activists in tying management to shareholder value creation. This was a huge departure—it was demanded like proxy access is being demanded today—and key executives were compensated with stock options, because the activists viewed that as the primary way to tie behavior to the shareholder returns. At that time, options were rare. But when you have options, you have the incentive to run the stock up to create personal worth from the shares.
Our biggest concern is not how much or how little executives are being paid, but that it undermines trust in the system when a few people make a disproportionate amount of the money. For example, you have a class of shareholders that makes too lopsided of an amount, plus they get taxed at a very low rate compared to other earners. All of this perpetuates short-termism. It’s worth reforming our tax system and compensation structures in that light and getting back to basics. Maybe compensating people with a base salary and a bonus was not a bad way.
Odland: Our view is that you shouldn’t throw people off boards to achieve board diversity. Rather, as directors retire, replace every other one with one gender then the other—companies that do so will eventually reach parity on their boards. To my point about serving all of your constituents—70% of our GDP is consumer-driven, and most purchase decisions are made by women. They comprise a majority of the population and a majority of college graduates, but represent just 20% of the people who are accountable for the largest corporate decisions.
That’s why we’ve weaved the diversity story together with all of these issues that are typically addressed independently. Our view is that these are interdependent. It’s up to business leaders to reengage and take these matters into their own hands. If they leave these issues on the backburner, governments or NGOs (as they have in other countries) will take action. Business leaders need to clean up their own houses, and in so doing, we will evolve our system of capitalism and make everyone more prosperous.
“To me, CEO also stands for ‘customers, employees and owners,’ and the fact that you have to know and serve all your stakeholders.”
The following is an excerpt from Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity, by Steve Odland and Joseph J. Minarik. The text below appears on pages 52-54 as a part of Chapter 3, “Focusing on Long-Term Value: Reversing Business Short-Termism.”
Causes. If corporate short-termism carries such risk for the long-term interests of companies and the larger economy, how did it grow to be so pervasive? Research implicates a number of intertwined factors: incentive systems (both explicit and unstated), investor pressures, regulations, tax structures, financial metrics and accounting rules, trading technologies, and even business cultures and managerial mindsets.
Specifically:
The end result is the reality—or at the very least, a public perception—that some investors and executives are draining value from those companies in the short run, personally profiting from it, and then leaving the weakened companies—and the employees and communities that depend on them—behind to deal with the consequences.
Balancing the Short- and Long-Term. We do not advocate ignoring shareholders, or the need for short-term results, or the beneficial role that some activist investors play. Investors who are too entrenched can stifle productive change. One of the strengths of capitalism is that investment can move to its best and most effective uses in light of changes in technology, demand and the effectiveness of an enterprise’s management.
Investors can withdraw their capital from companies that are not managing for the future effectively. The challenge, of course, is for investors to be able to discern when a company’s poor financial performance in the present presages deeper future problems versus when that poor performance is simply a temporary blip or the result of management appropriately incurring costs in the present to enhance the company’s future performance and sustainability.
It is challenging to strike the right balance between the short and the long term, especially given that directors and managers typically must make decisions under high levels of uncertainty arising from sources both external and internal to the company. Uncertainty about the future of government fiscal, monetary and regulatory policies is one source of uncertainty. Changes in markets, technology and other economic events present another set of challenges. The flexibility of directors and managers to make quick decisions in response to such changes and manage the associated risks is a strength of the U.S. economy that should not be underrated or lightly discarded.
What are corporate leaders to do in light of the grave harms of corporate short-termism, the set of pressures driving companies in this direction, and the admitted difficulty of striking the right balance between long- and short-term goals? Although we recognize the challenge of the situation, there are steps that corporate leaders—both members of corporate boards and executives—can take to move their companies toward greater focus on long-term sustainability, thereby benefiting not only their companies, but also the sustainability of capitalism as a whole.