Go Long: Why Long-term Thinking Is Your Best Short-term Strategy (Wharton Digital Press, 2018) by Dennis Carey, Brian Dumaine, Michael Useem, and Rodney Zemmel is a short book packed with managerial, and investing, insight. In the first part it profiles leaders who went long: Alan Mulally at Ford, Larry Merlo at CVS, Paul Polman at Unilever (LON:ULVR), Ivan Seidenberg at Verizon, Sir George Buckley at 3M, and Hewlett Packard Enterprise and Costco (NASDAQ:COST) director Maggie Wilderotter. Part two offers principles for leaders who want to start thinking long term.
Some CEOs use long-term metrics as organizing principles. Alan Mulally invoked PGA (profitable growth for all), which is revenue times margins. His goal at Ford, even as he faced a $17 billion shortfall in a single year when he joined the company, was to use that measure to achieve a 10% to 15% compounded annual growth rate. How would Ford achieve this kind of growth? “The only way to raise revenue is to make products and provide services people want and value, and good companies improve their margins every year by improving quality and productivity. Mulally says the trick is to work both of those levers.” At each of his business review meetings, Mulally asked his 16 top executives to apply PGA to a five-year horizon: “imagine five bars representing profits going out five years, and each one going up 15%. That simple exercise got the executives to look five years out every week, every quarter, every year—even while they were dealing with short-term crises.”
The title of the chapter dealing with Sir George Buckley is “R&D Is the Last Place to Cut.” In the four years before Buckley became chairman and CEO of 3M in 2005,capital spending had been slashed by 65% and R&D by 25%. Buckley believed that the company’s sluggish growth was the result of shortchanging innovation. He “reached back into 3M’s history and reinstated a key metric known as the New Product Vitality Index.” He calculated that to grow at a 4% compounded annual growth rate above market growth would require that more than 30% of the company’s revenues come from products introduced in the last five years. “By the time he took mandatory retirement at age 65 in 2012, Buckley had grown the share of new products launched over the previous five years from 8% of sales to 34% of sales.”
Traditionally Wall Street hasn’t rewarded companies that plow earnings back into R&D and other capital expenditures. Goldman Sachs (NYSE:GS) found that between 1991 and 2016 the stock returns of companies offering the highest combined dividend and share-buyback yields outpaced those of companies that spent more on R&D. Is the trend starting to shift? It’s too early to say, but last year “those companies in the Goldman study that spent more on capital expenditures and R&D outperformed those offering high dividends and buybacks by 11 percentage points.”
Go Long is a wonderful mini-manual for corporate executives and members of boards of public companies. But it is also meant to educate investors, to get them to think beyond the next quarter and to reward companies that focus on longer-term goals.