Why nobody thinks long term

‘Rotten corporate culture’.Carillio_Master logo_lock up_A

‘A relentless dash for cash’.

‘Recklessness, hubris and greed’.

Just three of the phrases (and by no means the most scathing) used by the Parliamentary Business Committee in their report about the demise of Carillion, the UK construction and facilities giant that went into liquidation in January.

There’s no doubt who the MPs regard as the villains of the piece. Carillion’s former directors make an easy target: unlikeable, unrepentant – and relatively unscathed by the catastrophic collapse that cost thousands of employees and suppliers their jobs and livelihoods.

But let’s pause for a moment and imagine that they weren’t such pantomime villains.

Let’s imagine they were trying to run a complex public business in a difficult market, with pressure from investors to deliver growth, at the same time their margins were being relentlessly squeezed.

That is, after all, what happens in most PLC boardrooms every day (especially in tricky markets like construction and retail). Senior executives under pressure have to make difficult decisions.

Very often, those decisions boil down to a choice between ‘what’s best for the business in the long term’ and ‘what will help us hit our targets for the quarter’.

Given that there’s likely to be a lot more scrutiny of their short-term results (and that most of their bonus is likely to be pegged to them), should we really be surprised that the balance doesn’t very often come down in favour of what’s best for the business in the long term?

In my experience, this is invariably what’s at the heart of a ‘rotten culture’.

Carillion’s collapse is not a story of a few bad executives making rogue decisions in their own best interests. It’s a story of what’s wrong with a depressingly large number of public corporations.

They’re so busy focusing on the six to twelve months in front of them that they never lift their heads up to look further ahead.

Which means they never see the cliff edge they’re about to fall off.

During the several years that Carillion was building up the £7bn in liabilities that eventually pushed it over that cliff, it never once stopped paying out handsome dividends to its investors.

The board could have used those dividend payments to reduce the debt, or streamline the business, or balance the pension fund. But they probably would have been fired for doing that. Instead, they did what the investors wanted them to do and they got a big, fat bonus for it.

Which leaves me wondering who the real villains are here.

The executives who prioritise short-term targets over long-term sustainability?

Or the investors who reward them for doing it?

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