January 29, 2019

Capitalism and the Long Term

Gerard Smith
Managing Principal

Towards the end of an excellent speech about capitalism and the responsibilities of business leaders, published in the Harvard Business School Alumni Bulletin, investor and hedge fund manager Seth Klarman warns:

When capitalism goes unchecked and unexamined, and management is seduced by a narrow and myopic perspective, the pendulum can swing in directions where capitalism’s benefits are discounted and its flaws exaggerated, thereby leaving its future even more clouded and uncertain. Thus, the rush to the short term is itself a destabilizing force, a negative feedback loop.

And a similar point was made about the damage that Twitter is inflicting on journalism, in an apologetic piece by Farhad Manjoo in the New York Times. Nor is the trend to short-termism an exclusively corporate phenomenon—it is widespread, shared by companies, households, and society itself. That’s something that FSG has observed, and pungently commented on in the past (see especially ‘The War on The Future’).

Capitalism’s instability, and its possible consequences, are forces for change that we have explored in various alternative futures for our clients, over the 20+ years that we have been running scenario-based strategic planning exercises. But we would also like to think that the work we engage in with our clients is a particularly helpful tool for the deliberative thinking necessary for good decision-making, which, if it were widespread, Klarman argues, would create a positive feedback loop.

Because the more important message in Klarman’s speech, and indeed in the other articles referred to here, is that embracing the long term is important. Not at the expense of the short term; as he says, “Management is there to decide, and in business you must often decide quickly, without complete information, or the time to consider every alternative.” But management is also employed ‘to navigate, to steer the ship, to set a course, and then to make midcourse corrections.’”

The beautiful pragmatism of scenario planning is, of course, that it seeks to balance all of these needs – by embracing uncertainty and looking to the long term, while at the same time focusing on what you need to do today. It is not future strategy, but strategy for today that contemplates future challenges and opportunities. And while a longer-term focus does not of itself instill sound values into leadership, who can simply substitute long term greed for short term greed, the proper use of scenarios dictates that full consideration be given to every aspect of the operating environment. It is an “outside in” approach that forces decision makers to take context into account. Klarman’s point is that business leaders need to make hard choices – but these choices can be made easier when strategies, either current or potential, are stress-tested across a range of alternative futures. Scenarios, then, can act not just as a source for innovative long-term strategies, but also as a filter against which to stress-test those ideas.

Thoughts?