In the business world, it’s widely accepted that maximizing value for shareholders is the ultimate measure of success. But in recent years, more voices have been calling for emphasis on non-financial concerns like sustainability, inclusivity, social progress, etc. Is this a threat to investor rights? I see this as an issue of long-term vs short-term strategy.
A business leader who fails to protect investors is headed for trouble. Shareholders make business possible by putting their capital at risk and they deserve to be rewarded. Furthermore, financial returns are the clearest way to separate success from failure, creating essential accountability.
But real wealth comes from steady compounding over many years, and it requires the cooperation of employees and communities. Happy employees are more productive, creative, and they stick around longer. Friendly communities provide customers and support (or don’t resist) business expansion. With those points in mind, it makes sense to sacrifice some profits now to promote success in the long run. That’s what investing is all about.
It’s hard to know how much of today’s bottom line to trade for vague long-term benefits. But cultivating great relationships is one of the best investments we can make. Even small gestures like showing up to local fundraiser and making a modest contribution can build the kind of goodwill in a community that becomes priceless when problems arise.
Short-term thinking is a danger that cuts both ways. Over-investing in short-term solutions can be as bad, or worse, than underinvesting in employees and relationships. Businesses are not jobs programs or charities. If we spend too much on unproductive employees or community programs of dubious benefit, then our businesses suffer. The bottom line matters, and a money-losing business will die.
A business needs healthy finances like a person needs oxygen — all the time. And the kind of long-term wealth creation I want also depends on engaged employees, healthy communities, and strong relationships. Good strategy includes both sides. Finding the right balance is the hard part.