The value of long-term thinking

Business leaders should model their perspective on that of co-operatives and credit unions Capitalism is facing a crisis. The legacy of the current generation of business leaders will...

Business leaders should model their perspective on that of co-operatives and credit unions

Capitalism is facing a crisis. The legacy of the current generation of business leaders will be their success or failure in fundamentally changing the role our organizations play.

The recent near-collapse of the financial system and its ongoing fallout brought to light systemic problems — but it didn’t create them. Much of the business community is afflicted with a compulsion to maximize short-term profit at the expense of virtually all else. This obsession, fuelled by the growing influence of the market’s reaction to quarterly earnings, has stripped many otherwise well-run companies of their perspective.

According to McKinsey & Company, more than three-quarters of a company’s value depends on cash flows expected three or more years out. Unfortunately, markets today are not doing an effective job of assessing corporate strategies with an eye that far into the future. As a result, there is a misalignment between firms’ share price and their actual value.

Investors’ demand for short-term movement has become increasingly problematic over the past few decades. Since the 1970s, the New York Stock Exchange’s average holding period has plummeted from over six years to less than a year.

In these circumstances, investors aren’t truly “owners,” and may very well not be patrons either. But what if they were both? What if companies’ customers were also their owners, and were genuinely interested in building up their long-term value and furthering the sustainability of their communities?

This is where co-operatives and credit unions come in. They are owned and accountable to their members, who use their services. They operate on a democratic basis, and members contribute equally to their capital. As such, they focus on improving service to members and building long-term value.

Members reinvest a portion of surpluses into the organization to build up reserves, at least part of which is indivisible. For many co-ops, several generations of members have not taken capital out of the company, allowing it to flourish into some of the best, most stable enterprises around.

These organizations owe a huge debt of gratitude to the commitment and foresight of their predecessors, just as their current membership is building upon their success for the benefit of future generations. Warren Buffett has said his favourite holding period is “forever.” For co-op members, this ideal is reality.

The principle of “one share, one vote” exacerbates institutional myopia. Most of those voting at this year’s annual meeting will likely have sold their shares by the time next year’s comes around. In contrast, co-ops are governed democratically, meaning they are not controlled by capital, but by people. By definition, these are members of a community the organization serves, and users of its products or services. It’s little wonder, then, that in more than 1,100 Canadian communities, a credit union or caisse populaire is the only remaining financial service provider.

If more companies shared this long-term, service-oriented approach, would they not enjoy more public trust? Would they not take on a different, more constructive role in our society and economy?

The 2012 Edelman Trust Barometer revealed that trust in business has fallen globally to a mere 53 per cent. According to a recent international survey by Bloomberg, 70 per cent of investors, analysts and traders believe “the system is in trouble,” and nearly one-third agree it needs a “radical reworking of the rules and regulations.”

Business leaders need to fundamentally reconsider their role in our society. They must overcome their fixation with short-term profit maximization and shift their emphasis to long-term value creation. We need business to be at its best as a force for sustainable economic development.

As Canadian co-ops have a proven over the past 150 years, it can be done. The value of co-ops around the world has been recognized by the United Nations, which proclaimed 2012 the International Year of Co-operatives.

Now is not the time to tinker around the edges. Now is the time for bold action.

About the author

Kathy Bardswick is President and Chief Executive Officer of The Co-operators Group Limited in Guelph, Ontario, since 1978. She is also a board member of Addenda Capital Inc. and was a member of the executive committee of The Conference Board of Canada from 2004 to 2011. She serves as Chair of the International Cooperative and Mutual Insurance Federation and Vice-Chair of the University of Guelph’s Board of Governors. She is currently a member of the ICMIF Executive. She is also a board member of the International Co-operative Alliance (ICA).

Kathy Bardswick will be part of the Future cooperative leaders’ breakfast and the Round Table Reactions of Practitioners: What they found surprising or astonishing about today’s presentations, on Tuesday, October 9, 2012, at 7:00 a.m. and 3:55 p.m.

Source: Thanks to Howard Elliott, Managing Editor, The Hamilton Spectator

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