With Martin G. Moore

Episode #102

Leaving a Legacy: The curse of short-termism

It’s no surprise that leaders increasingly fall into the trap of acting only for short-term results, not really considering what they leave behind in the longer term. This trend seems to have accelerated with the instant availability of information (both true and fabricated).

Do leaders ever think of their legacy after their postings? Do most even care?

The issues that drive leaders to act in the short term are complex: Why is there such a disproportionate focus on short term results? How much of a role does self-interest play, and what would a good, long-term legacy look like?

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Episode #102 Leaving a Legacy: The curse of short-termism

Hey there, and welcome to Episode 102 of the No Bullsh!t Leadership podcast. This week’s episode, Leaving a Legacy: The curse of short-termism. It’s no surprise that leaders increasingly fall into the trap of acting only in the short term interest of their stakeholders, not the longterm. This trend seems to have accelerated with the instant availability of information, both true and fabricated. The timing couldn’t be better to take on this issue today because we see political leaders driven by opinion polls, not necessarily achieving the best results. Our anchoring question comes from our listener, Chris; “Do leaders ever think of their legacy after their postings? Do most even care? It seems that often they’re in there for two to four years, start a bunch of initiatives or changes, yet they’re not around to see if they worked out”. Thanks for that, Chris. Look, it’s an important observation and it has a ring of truth to it, but these are complex issues. This week we’re going to explore some of them so that you can form your own opinion on the leaders around you who may or may not care about the legacy they leave. We’ll start by asking why we’ve seen such trend towards the short term. I’ll reveal why most leaders don’t actually think they’re working only in the short term. We’ll talk about the role that self-interest plays and I’ll finish with some musings about what a good longterm legacy might look like. So let’s get into it.

We all suspect that when politicians make decisions, they don’t do it through the lens of “What’s best for the people that I’ve been elected to govern”, but rather, “How do I get reelected”? That attitude has seemed to explode as the opinion polls have become obvious during the pandemic. Although it’s probably always been that way. Decisions are often being made to deliver what the opinion polls tell them is popular, not to deliver the best longterm outcomes. We’ll no doubt see generational economic carnage as a result of the COVID-19 pandemic. And I’m looking at quite a few countries that I have on my watch list when I say that. Politicians who live on a three to four year election cycle often don’t feel the pressing need to act on longer term issues. This is why we see in Australia, the debacle around climate and energy policy, which governments of both flavours have chosen to ignore for at least 10 years.

Why? Because the tough decisions that are required will be roundly unpopular, and they know that. If you haven’t heard it yet, it’s probably worth going back to the pre-COVID Episode 72: Climate Change Unplugged. Now it’s easy to poke fun at politicians, but their job is incredibly difficult and I wouldn’t do it for any money, believe me. So let’s stick to business. It’s a little easier to unravel. Global mining behemoth Rio Tinto’s CEO, Jean-Sébastien Jacques has been in the press for his company’s destruction of a culturally significant archaeological site at Yukon Gorge, while they were carrying out blasting work at one of its iron ore leases in Western Australia. A banner headline in last week’s Australian Financial Review screamed “Yukon Gorge is not the legacy Rio boss had hoped for”. The article, which was actually pretty balanced, spoke about Mr. Jacques’ preferred legacy. Three things: improve safety, a lower carbon footprint, and a batch of new growth assets.

All of which takes a long term focus. So he’s at once dealing with the legacy of his predecessors, both good and bad, and thinking about what he leaves for the next generation. Jean-Sébastien Jacques is actually quoted in this article as saying “That the short term time horizon is arguably the single biggest reason why companies underperform and fail”. Well, let’s look at how he’s doing so far after around four years in the top job. For the first time in its history, 147 years of history, Rio had a fatality free year across its global business. This is more momentous than it sounds, and it didn’t happen by accident, if you’ll pardon the pun. But for the last five years, Rio’s all injury rate has been pretty similar year on year and undoubtedly it is world class. So Jacques had inherited a pretty good safety culture there, in any case.

Let’s look at the carbon footprint. Rio sold its last coal assets about two years ago, and this has greatly reduced its carbon footprint. But if we get behind the rhetoric, there are some really interesting messages that run a little counter to this. One of these is a quote from Chairman Simon Thompson in the company’s 2019 annual report. He talks about the “hard to abate sectors” as they’re called in the mining industry, aluminium smelting, steel production, and shipping. And Thompson says “Enabling regulation, such as carbon pricing, is essential to incentivize the de-carbonization of these sectors, together with measures to maintain the competitiveness of trade exposed industries”. Let me just translate that corporate speak for you. What he’s saying is if everyone else reduces their carbon footprint, we can get exemptions for the carbon intensive parts of our portfolio, so that Rio shareholders aren’t penalised. And when it comes to the pipeline of future options, Rio is developing some assets at the moment that look like they’ll feed pretty nicely into Jacques’ third legacy ambition.

What you got to remember though, this is much easier when you have a cash cow inside your business. Rio’s iron ore business is incredibly profitable. In 2019 it brought in over 50% of Rio Tinto’s total revenue and it brought in over 70% of Rio’s EBITDA. And the EBITDA margin was around 67%. So two thirds of every dollar made in their iron ore business drops down to the EBITDA line. What conclusion do we draw from this now? Well in terms of Jacques’ three legacy ambitions, they’re actually going pretty well. But what does everyone see in the press? What’s in the public persona? Forty-six thousand year old culturally significant site blasted into oblivion by Rio Tinto on Jean-Sébastien Jacques’ watch.

Now this was just a timely example, I’m neither supporting nor condemning Mr. Jacques, and certainly Rio Tinto is an awesome business. Time will tell how all this pans out, but he holds a view that 10 years is required in a role like his to make a real difference. And you know what? He’s probably right. In most developed countries, the average CEO tenure is around five years. Investment of resources to create value beyond their expected tenure is quite difficult. And just when things are going well, a new person comes in and puts a new stamp on things. There are shareholder pressures. The result’s of listed companies are released by quarter or by half year and sell side analysts are employed to follow certain industries and companies to provide opinions on the current and future performance of the businesses. These reports can drastically affect the share price. The analysts come out with ratings, buy, hold, sell outperform underperform. This affects how the funds that could potentially buy shares view the company, and the demand affects price. So a good rule of thumb for longterm legacy is number one, respect the history. You don’t know what pressures and constraints the last person operated under. Number two, think of yourself as a steward of that brand at a particular point in time. And number three, leave it in its best possible shape to hand over to the next leader, which requires commitment and energy for change.

Let’s just pause to have a little think about why most leaders don’t realise when they’re working in the short term. I’ve got to go from one Jacques to another, Jean-Sebastian at Rio through to Elliot Jacques, the Canadian psychoanalyst and management consultant. He started the theory of stratified systems within organisations. This basically talks about the concept of observing different time horizons, at different organisational levels. As responsibilities increase at high levels, so too, does the time horizon. As CEO of a significant business, the focus needs to be on the perpetuation of the organisation. So in other words, how does this remain strong and growing and profitable into the future? Now this supposedly requires you to look five to ten years into the future as the dominant time horizon for your work as a CEO. On the other hand, as a frontline supervisor, your focus could be today, this week, or the month, at the latest. It’s harder than it looks to focus on a long time horizon.

I had weeks as a CEO where it was difficult to look five days ahead, let alone five years. We all face the pressures of immediacy and this can make it difficult to pursue longterm value. There will always be people to tell us what we should be doing at any given point in time. There’s always a thousand armchair quarterbacks for every player. But we need to realise that pressures come from all sides, from all stakeholders, and it’s impossible to satisfy them all. One of the great examples of longterm strategy was that at CS Energy, we were trying to change the portfolio to something completely different. And when you’ve got annual revenues of about a billion dollars and over 95% of that comes from coal fired power stations, making strategic choices to replace that with new forms of revenue is really tough, and it doesn’t happen quickly. There’s just a problem with scale. So because a lot of leaders find themselves in an environment where they’re constrained, where they’re not able to think longer term, they start to believe their own bullshit. They tell stories about cultural change and organisational improvement, that simply aren’t true. And they fall back on the old “If I said it, then it happened”.

A number of years ago, a wise, old colleague said to me, “Marty, in the race of life, you can bet on self interest to win by three lengths”. There is a massive problem that’s created with remuneration structures, because they’re geared towards the short term. And even, when we’re talking about things like longterm incentives, it’s easy to gain total shareholder return. Now everyone wants to look good. Leaders are always chasing their next promotion or their next pay rise if they’re ambitious, but strategic planning is done annually, and it’s boiled down into KPIs for that year. So leaders focus on these targets, particularly if they’re linked to financial rewards. They want to be able to say that they’ve achieved them. Resumes don’t quite have the same punch when they can’t describe clear outcomes. For example, “I lifted profitability by 25%”, sounds much better than, “I had a crack at developing a new product, but didn’t stick around for long enough to see how it really turned out”.

We just have to remember the old axiom, what gets measured gets managed and what gets rewarded gets done. So even longterm incentive plans drive short-termism these days. Performance against industry comparison benchmarks can easily be looked after with some accounting trickery. And there is endless accounting trickery that can be employed to put lipstick on the bulldog. Leaders who focus on their own self interest, above anything else, have no hesitation in using everything they can. And this is why so many short term leaders are there, because the rewards are there for them to take, if they behave the way they do.

Let’s finish off by having a look at what a good legacy might look like if you could put your short termism and self-interest aside. One of my early leadership influences was a woman I worked for by the name of Janice Hagen. Now Janice was incredibly cool under pressure. She was super bright and she was really, really efficient at what she did. I’d probably go so far as to say she was the first really good leader I worked for. Janice was a project director and had a pretty balanced perspective on what success might look like. I remember her saying to me once, “You can’t judge the success of a project simply on the outcome. There are just too many things that are outside of your control and any one of those could bring it down or influence it for the negative”. Changes in funding, changes in user requirements, the competitive markets moving all the time.

She said “The only way to truly judge success is by what happened to the people on the way through. What did you do to improve them? And what state were they in when it all finished”? In a volatile world where many factors conspire to thwart your best laid plans, the legacy is actually in the people. Now my view of legacy was that it’s really important to improve the things that most unlock the latent value in the organisation. But apart from this, the need to build stronger foundations for the next person is absolutely critical. So what are these foundations? One of the most important things is capability building. Are you bringing in and developing talent for the organisation and finding out how to keep it? Are you setting a standard, that’s high enough for you to increase your desirable turnover to acceptable levels, as we spoke about in last week’s episode. Basically it’s up to you to make sure that you increase the quality of the gene pool in any team that you’re leading.

What sort of a culture are you leaving behind? Well, first of all, having really strong focus on accountability and empowerment is the way you’re going to get any team to execute better and more effectively. Once you do that, it doesn’t matter what you push through that pipe, it’s going to flow freely. You can apply any strategy to it, any objectives, any projects, any initiatives, and they’re going to be done well because you’ve got that core foundational capability to do them. Have you created a culture where it’s driven by value creation, not by activity? Have you driven a culture where excellence over perfection is the way that people do their work and they move quickly and gain organisational momentum? Do people have a really strong focus on a few simple goals that unlock the most value? See all of this can be done in your team, no matter what organisational level you’re at, and no matter where you put your focus. These are absolutely no regrets moves.

Have you made the right strategic choices for the business if you’re at a higher level? So if Rio Tinto wants to reduce its carbon footprint, the strategic decision to sell all of its coal assets is a really good one. If you are at a senior enough level, work out what’s going to drive the most future value and get after that. When we boil it all down, a lot of this simply comes down to your mindset. You are just a steward of the organization’s resources for the limited time that you’re in the role. You’ve got to think about it as though you’re still going to be there in 20 years to live with the consequences of anything you do today. You have to treat the assets like they’re your assets. You have to treat the money like it’s your money and you have to treat the future of the organisation like it’s the only future that you’ll ever have. This might just help you to look past the edge of your desk and think about the longterm legacy you leave.

Alright, so that brings us to the end of Episode 102. Thanks so much for joining us, and remember at Your CEO Mentor, our purpose is to improve the quality of leaders globally. So please take a few minutes to rate and review the podcast or share it with your network. I’m really looking forward to next week’s episode, When you’re ready to get serious.

Until then, I know you’ll take every opportunity you can to be a no bullsh!t leader!


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