Corporate governance involves ensuring that companies are directed and controlled in a manner that aligns with the interests of shareholders and other stakeholders. A significant debate within this field concerns whether boards should have the right to manage companies with a focus on long-term goals. This has sparked the debate with compelling arguments for and against allowing boards to prioritise long-term management.
One of the key arguments in favour of boards focusing on long-term management is that it allows for sustained company growth. Companies often require time to implement strategies that deliver significant returns. Quick gains may satisfy shareholders in the short term, but they can jeopardise the company's ability to invest in future opportunities, research, and development. Prioritising long-term goals ensures that boards can steer the company towards sustainable growth, longevity and relevance in the market.
Another argument is that long-term management protects the interests of various stakeholders, not just shareholders. Employees, customers, suppliers, and the communities in which companies operate all have a vested interest in the long-term success of the company. Boards that focus on the long term can create value that benefits these groups, rather than merely chasing short-term profits, which might come at their expense. For example, investment in employee development or environmentally friendly practices might reduce immediate profits but contribute to a stronger, more resilient company.
Another argument is short-termism, the excessive focus on short-term results. This can pose a significant risk when boards are pressured to deliver immediate returns. This can lead to decisions that boost short-term financial performance but are detrimental to the company in the long run. Examples include cutting research and development budgets, reducing the workforce, or engaging in aggressive cost-cutting measures that erode company morale and innovation. Boards with the right to manage for the long term can resist these pressures and make decisions that are in the best interest of the company’s future.
Long-term management also aligns with the growing emphasis on ethical business practices. There is increasing scrutiny on how companies impact society and the environment. Boards that focus on the long term are more likely to adopt ethical practices that might not immediately boost profits but contribute to the company's reputation and long-term success. Ethical business practices not only enhance a company's image but can also lead to better relationships with regulators, customers, and other stakeholders, ultimately supporting the company's objectives.
However, those who see no wrong in short-termism put forward strong arguments. A primary argument against granting boards the right to focus solely on long-term management is that it might reduce accountability to shareholders. Shareholders are the owners of the company, and they may have different priorities, such as the desire for regular dividends or capital gains. If boards are too focused on the long term, they might ignore or downplay the short-term interests of shareholders, leading to a disconnect between the board and the owners. Shareholders might argue that they should have more say in how their investments are managed, particularly when immediate returns are at stake.
Another concern is that giving boards the right to manage for the long term could lead to mismanagement. Without the pressure to deliver short-term results, boards might become complacent, making decisions that do not necessarily benefit the company or its shareholders. Long-term goals are often more challenging to measure and achieve, making it easier for boards to justify poor performance over extended periods. This lack of short-term accountability could result in ineffective management, where boards are not held to high standards of performance.
In recent years, shareholder activism has become a powerful force in corporate governance. Shareholders increasingly demand that boards deliver results promptly and are willing to challenge boards that do not meet their expectations. Allowing boards to manage for the long term might undermine shareholder activism, as it could limit shareholders' ability to influence company decisions. Activists might argue that a balance is needed, where boards are encouraged to think long-term but are also held accountable for short-term performance.
Finally, there is the argument that a focus on long-term management might reduce a company's competitiveness in the market. In industries where innovation and market changes occur rapidly, companies need to be agile and responsive. Boards that are too focused on the long term might miss opportunities or fail to adapt to market shifts. Competitors that are more flexible and responsive might outperform companies with boards that are overly focused on future goals.
Given the arguments for and against long-term management, the ideal approach may lie in striking a balance. Boards should be empowered to plan and manage for the future, ensuring the company is well-positioned for long-term success. However, they should also be held accountable for short-term performance, ensuring that shareholders' interests are not ignored.
One way to achieve this balance is through clear communication between the board and shareholders. Boards can outline their long-term strategies while also demonstrating how they will deliver value in the short term. Transparency in decision-making and regular updates on progress can help maintain shareholder trust while allowing boards to pursue long-term objectives.
Additionally, corporate governance structures can be designed to support both short-term and long-term goals. For example, performance metrics could include a mix of short-term financial results and long-term strategic achievements. This approach ensures that boards are incentivised to consider both immediate and future outcomes.
The debate over whether boards should have the right to manage companies for the long term is complex. On one hand, long-term management supports sustainable growth, protects stakeholders, and aligns with ethical standards. On the other hand, it could reduce accountability, lead to mismanagement, and hinder market competitiveness. The best approach may involve a balanced strategy that allows boards to plan for the future while remaining accountable for short-term performance. Through clear communication and well-designed governance structures, boards can manage companies in a way that benefits both shareholders and the wider community over time.
Research & Advocacy Department,
Chartered Institute of Directors (CIoD)
28, Olawale Edun Road, (Formerly Cameron Road), Ikoyi, Lagos.