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Why It Pays For CEOs To Take The Long View

The new CEO’s dilemma

New CEOs often hear two conflicting messages: first, get out of the gate quickly because your honeymoon will be short and you need to show results; second, play for the long haul. Can you do both? The answer is yes, but it’s hard, and the results can be bittersweet. The companies of new CEOs who shifted their focus to the long term under-performed their counterparts at first and out-performed only after the CEOs had left.

We cross-referenced two robust data sources to get a better view of this problem. The first is our database of almost 600 CEOs and the details of their tenures and performance. Earlier research using this data showed how the companies of new CEOs who make bold moves early on are likely to outperform their counterparts. The second source is data from our colleagues at the McKinsey Global Institute (MGI) in collaboration with FCLTGlobal. Research based on these data found that when companies look forward and manage over a long-term horizon, they outperform their industry counterparts on key financial measures. We define a long-term focus by five measures of a company’s orientation, including sustainable margin growth, earnings that track cash flow, and investments that are more consistent and larger than those of companies managed for the short term. By integrating these two data sources, we could assess not only the actions of individual CEOs who made the move to managing for the long term but also how these decisions played out.

CEOs who pivot
Our first finding was that only a small number of CEOs pivoted from the short to the long term. From 2001 to 2014, we found fewer than 80 companies in our sample of 600, and just 25 following the arrival of a new CEO (these 25 CEOs led multibillion-dollar companies across industries).4 That’s worth pondering, since our MGI research clearly suggests that every CEO should seek to shift horizons. Strikingly, new CEOs who pivot to the long term—4 percent of our sample—are even rarer than the CEOs who delivered truly exceptional performance in our earlier research. Those overachievers, the top 5 percent of our sample, logged a fivefold increase in total shareholder returns (TRS) over their tenures.

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