1. Love was in the air (and financial reserves are in the wallet)

    April 26, 2018 by ahmed

    insights

    Originally posted on Blogrige by Harry Hertz

    Spring 2018
    The greatest challenge I have each year when I return from the Baldrige Program’s annual Quest for Excellence® Conference (QE) is prioritizing the most important messages for me and my organization, whether that is my work organization, volunteer organization, or—yes—my family (this one might be stealth). There are always so many great ideas that I know I will not succeed at implementing any of them unless I select only a few for action. The 30th anniversary conference was no different. I returned energized and started organizing my thoughts.

    My process begins with seeking thematic highlights and also capturing one or two individual gems of wisdom that I heard from individual speakers. Maybe these will help you set some of your priorities, even if you were unable to attend the conference. Maybe my reflections from this year’s conference will also encourage you to attend QE next year and discover your own themes!This year there were five 2017 Baldrige Award recipients (link is external) from the business, health care, and nonprofit sectors: Bristol Tennessee Essential Services (BTES), Stellar Solutions (Stellar), Adventist Health Castle (AHC), Southcentral Foundation (SCF), and City of Fort Collins (Fort Collins). Their products and services are widely different, but their approaches to excellence have remarkably similar, positive outcomes.

    Six Themes
    Following are my six themes. We have seen components of each of them before—they are not new concepts—but when they are practiced together, they yield very powerful results. I will begin with the most pervasive theme this year. It has always been present in Baldrige Award recipients; however, this year the word (not just the intent) was used frequently and unabashedly, and it set the tone for me for the whole conference. The word is love.

    Love Matters
    These five organizations love their employees, love their customers, and love their communities. For all of them it is about relationships. And as an outcome of those relationships they have the financial resources to treat all these people well.I was first struck by the boldness of this theme when Kathy Raethel of AHC shared her organization’s core competencies, of which one is “Love Matters.” AHC focuses on a culture where love matters to the extent that it permeates all relationships and everything the organization does. Within the first 90 days of employment, all employees attend an empathy-building workshop entitled “In Their Shoes.” This is accompanied by a set of “Always Behaviors” to promote caring interactions among workforce members and patients and a compassionate, healing ministry.SCF, too, is all about relationships—the organization’s customers are its owners, in deed and in fact. The acronym for SCF’s operating principles is RELATIONSHIPS. With those relationships, SCF goes “behind our eyes and with our hearts” to build true empathy.

    At Stellar, the vision is “satisfying our customers’ critical needs while realizing our dream jobs.” And 97% of Stellar’s employees say the leadership team shows an interest in each of them as a person, not just an employee.

    Fort Collins describes its culture with a three-word acronym: IT—WE—I. (IT is what we do, WE is the love for the people we work with, and I is the support for achieving my personal and professional growth.)

    BTES’s values statement uses the Rotary 4-Way Test (link is external), ending with “Is it fair to all? Will it build goodwill and better friendships? Will it be beneficial to all concerned?”

    Storytelling
    Highly technical organizations are not generally known for the softer side of people interactions. They generally focus on knowledge transfer, facts, and data.

    This is not true for Stellar; even with a geographically dispersed workforce serving at its contactors’ sites, Stellar has an annual storytelling issue of its Constellations newsletter. How else would you share dreams and dream jobs?

    BTES, another technical company, considers storytelling so important that it retains a professor to teach storytelling to its employees. SCF started each of its presentations at QE with the speakers sharing their tribe and a story. At SCF, a core concept is WELLNESS, and the first “S” stands for “share our stories and our hearts.” AHC, too, values storytelling, saying it is about every patient, every employee.

    Community Commitment
    All Baldrige Award recipients are good citizens and stewards of their communities. This year, community focus was at the core of each of the recipients’ frame of reference, going beyond the focus I have seen in the past.

    For Fort Collins, its core competency is “commitment to community.” For Stellar, community outreach is one of its 16 key processes, and 100 percent of the employees say, “I feel good about the ways we contribute to the community.” They contribute to their community through the Stellar Solutions Foundation and through humanitarian research and development with their Quakefinder project (for earthquakes) that additionally fosters STEM education.

    BTES is a local business serving its local community. So every chance meeting of a BTES employee (or even a family member of an employee) with a Bristol citizen is an opportunity to listen to the voice of the customer. And those individual messages are causes for action when brought back to BTES. Its mission is about providing service to customers and the community.

    AHC exists because of community involvement. It was intense community interest that launched a campaign in 1953 to establish a medical center in Windward O‘ahu. Today, AHC is first in Hawaii for population health. The organization’s vision states, “We will transform the health experience of our community.”

    The SCF vision is “A Native Community that enjoys physical, mental, emotional and spiritual wellness.” And the mission is about working with the organization’s customer-owners to achieve wellness. In addition, SCF leaders talk about “growing their own” to guarantee health care to their community for generations to come.

    Process Orientation
    An organization doesn’t become a Baldrige Award recipient without a process orientation. This year’s award recipients brought that focus to a new level. I don’t remember a time in recent history where process focus has been so significantly a focus of senior leaders’ presentations and so well related to leadership systems. Furthermore, for these five organizations, the process focus is driven from the organizations’ visions and strategic plans.

    BTES has a defined process for cascading strategic plans down to each employee’s role. By the company’s open admission, Stellar employees “are rocket scientists,” who manage their performance through 16 key processes. Each process is defined using the Baldrige assessment scoring guidelines of ADLI (Approach, Deployment, Learning, and Integration) and LeTCI (Levels, Trends, Comparisons, and Integration). The LeTCI help ensure that appropriate results are defined and tracked for each process. Each process has a defined goal, objectives, subprocesses, measures, a “what we care about” statement, and tools and products.

    Surprisingly, Fort Collins also has 16 key processes. I don’t know that 16 is the magic number, but I do believe this coincidence has meaning—an organization needs a realistically trackable number of key processes or else they lose meaning as key processes and can’t be regularly reviewed by the senior leadership team. These key processes also serve as a communication tool of what is really important to achieving the mission and vision of the organization.

    One of the key lessons AHC learned on its Baldrige journey was that deploying an integrated strategy and performance management system creates a “remarkable ability to execute.” AHC specifically references a remarkable ability to execute for the benefit of employees, patients, and other key stakeholders. Finally, SCF, a two-time Baldrige Award recipient, is already well known from its prior Baldrige presentation on its Nuka system (link is external), an integrated process for care relationships and care delivery.

    Tracking Key Metrics Yields Great Financials
    This year, I saw a clear line of sight from strategy to customer and operational process key performance indicators, and to actual reported in-process and outcome measures. Furthermore, I repeatedly heard that when the right performance indicators are tracked, including key indicators of employee engagement, the financial performance outcomes will follow. This was a message delivered by all five recipients.

    Imagine a utility company that could go from broke to having five years of capital funding in the bank and deliver reliable electrical service with 60 minutes or less annual outage time for your household (that’s BTES). Imagine a health care system that could go from the bottom quartile to top decile performance in population health in five years and do it debt-free with a 10.3 percent EBIDA margin (that’s AHC). Imagine a health care system that is owned by its customers, delivers 97 percent customer satisfaction and performs in the 75th–90th percentile on many HEDIS measures (that’s SCF), while growing the operating reserve by 6 percent from 2012 to 2017. Imagine a city that receives a 90 percent rating on overall quality of city services and commits to being carbon-neutral by 2050, while maintaining a credit rating of “Aaa” by Moody’s, a rating maintained by only 4 percent of governments (that’s Fort Collins). Finally, imagine a small company of rocket scientists that has defined metrics for each of its 16 key processes, with leadership communication and community outreach being two of those key processes, and where 100 percent of your customers would recommend you to other organizations, with sufficient earnings to fund a foundation and humanitarian R&D (that’s Stellar).

    Technology Focus
    Today, technology is pervasive; but this year’s recipients uniformly went beyond the norm in using technology to drive innovations that serve their customers. Given the challenge of its extremely large and frequently remote geographic service, SCF has been a pioneer for years in the use of telemedicine. AHC prides itself on combining “state-of-the-art technology with state-of-the-heart care.” Stellar is doing rocket science “for a living,” while also developing autonomous trucks and performing humanitarian research on predicting earthquakes. BTES is delivering 10 Gbyte/sec Internet speeds to all its customers, while many of us are receiving residential service around 1 Gbyte/sec at premium rates. Fort Collins is one of the most digital cities in the United States, is reducing its carbon footprint while growing its population, and is already controlling traffic lights with Bluetooth data that react to the volume of traffic.

    I hope some of these six themes resonate with your organization. Considering these as six themes that exemplify contemporary excellence, I invite you to see if there are opportunities in these areas for your organization to pursue. Doing so isn’t rocket science (except for some of the technology)!

    Two Gems
    Occasionally, there are some simple truths that strike a particularly responsive chord with me because they provide great wisdom in a single statement. There were two of these gems in remarks made by Darin Atteberry, city manager of Fort Collins:

    “Treat metrics as a flashlight to shine attention on an opportunity for improvement, not as a hammer to beat on responsible people or processes.”

    I encourage you to consider how you use your overall organizational and process metrics.

    1. Are the metrics measuring what is important?
    2. Are you using them to guide performance improvement?
    3. Are you improving with a flashlight or a hammer?

    “Don’t lead in an average way; you’ll get average people and average performance.” Or to rephrase, “Lead your organization toward remarkable goals, and you will develop a remarkable workforce, producing remarkable results.”

    How Are You Leading Your Organization?

    • Are your goals to reach average or the 50th percentile? Or are your goals to reach the 90th percentile or benchmark performance?
    • Are you celebrating success along the way? Or are you ignoring or, even worse, punishing people for not making sufficient progress?
    • Are you using setbacks as a cause for negativity or a source of information to determine cause and reward process improvement?

    Are you on the road to performance excellence?


  2. Leadership practices of Stellar Solutions

    April 22, 2018 by ahmed

    stellar_rocket_fixed

    Originally posted on Blogrige by Dawn Bailey

    Five-Part Leadership Blog Series
    In this five-part blog series on the 2017 Baldrige Award recipients’ leadership presentations at the 30th Anniversary Quest for Excellence® Conference (April 8–11, 2018), senior leaders of the five new national role models share best practices and stories of how they achieved excellence.

    “Scientists Do Some Really Cool Stuff”
    Stellar Solutions, a woman-owned, aerospace engineering services business, has a noble vision: to align its employees’ dream jobs with critical customer needs, and among those customers are NASA, U.S. troops, the FAA, and even those of us who watch cable TV.

    According to Celeste Ford, founder and CEO, satellites in the sky send invisible signals to ground stations that turn them into meaningful data that allow us to receive cable signals and intelligence analysts and troops in the field to be informed. Stellar Solutions’ customers are those government and commercial entities that receive the needed data. “We pull [the data] together from end to end because there are different people building all of those things [from satellites to ground stations], and they have to work together. So, we’re systems engineers and systems integrators. . . . From SpaceX to the war in Syria, we work on the projects that give intelligence and information to our troops so that our government can do the right thing. Mission to Mars, we’re working on that, too,” she added.

    Ford said one way that Stellar Solutions has differentiated itself is to cross boundaries. “In aerospace, there are companies that handle civil and commercial, but . . . we do it all and take the nuggets of information from one sector to another as needed. And that is really a differentiator to getting things done quickly and innovatively,” she said.

    A Focus on Sustainability, Continuity
    A few years after founding the company in 1995, Ford said, they were getting good results, but “I always had this paranoia that I didn’t want to be the single point of failure as a founder. Now we had employees who were having babies and depending on us for putting food on their tables, so sustainability and continuity really became important to me.”

    In 2004, the company chose the Baldrige Excellence Framework. Why? Said Ford, “Because Baldrige is a framework that holds you accountable to what you think is important. It’s not a prescriptive checklist that makes you like everybody else, a fill-in-the-squares kind of thing.”

    Ford said the leadership staff viewed the Baldrige “Steps Toward Mature Processes” graphic. “I thought we were perfect because we were already doing everything that I could think of. . . . Then we sat down and said, besides financial results, what are our [forward-looking] metrics? How do we hold ourselves accountable for the most important thing [our vision: to satisfy our customers’ critical needs while realizing our dream jobs]? Our whole company is about that alignment. But how do you put a metric around that besides your gut?”

    When they started with the Baldrige framework, Ford said, we knew we had processes “because we got stuff done,” but there was no consensus. Today, the company has 16 defined processes supported by metrics. A monthly leadership meeting called Convergence, in addition to quarterly meetings, is used to focus and review the metrics and processes. In addition, templates are used to depict the processes; each template has a box for “what we care about the most” and the Baldrige evaluation factors.

    “We built Baldrige into the DNA of our company,” said Ford. “There isn’t a separate Baldrige thing. It’s just who we are.”

    100% Customer Satisfaction
    Stellar Solutions’ focus on its employees can be seen in its Fortune magazine’s distinction as “A Great Place to Work.” This distinction is super important, said Ford, “because we’re a services business. Our people are our products. You need to keep them, and you need to attract really good ones to do this hard work.”

    Of the nearly 200 Stellar employees, each employee can recite the vision. “It’s not something on a wall. It’s something that drives us every day,” she said.

    Ford said the company compares itself with the top 50 best companies because “we don’t want to compare ourselves to the average.” Recent results show that 97% of employees say that the Stellar Solutions Leadership Team “shows sincere interest in me as a person, not just an employee”; 97% say the Leadership Team “genuinely seeks and responds to my suggestions and ideas”; 97% say the Leadership Team’s “actions match its words”; 98% say the Leadership Team “is honest and ethical in its business practices”; and 100% say “I feel good about the ways we contribute to the community.”

    No Such Thing as a Plan on the Shelf
    Every single employee is involved in the annual strategic planning process. The focus is on “identifying what our current customers need, what new programs are out there that we should be working on, and what is happening and what should we do about it. . . . There’s no such thing at Stellar as a corporate plan that sits on an ivory shelf that no one looks at,” said Ford. “Every goal came from somebody for a good reason, from our customers’ critical needs and employee alignment with their dream jobs. Everyone owns a piece of our strategic plan. That’s important.”

    Stellar Solutions is organized by customer, with six goals or strategic perspectives:

    Goal 1: Current Customers
    (who are asked what’s the right size, right scope for Stellar Solutions’ involvement)

    Goal 2: Future Customers
    (focus is on innovation, new high-impact programs)

    Goal 3: Situational Awareness
    (to inform the way ahead, the question is asked, what customers and things should we be focusing on three years out?)

    Goal 4: Stellar Workforce
    (attracting and retaining key players)

    Goal 5: Business Operations
    (scaling smartly and working at “the speed of customers’ needs”)

    Goal 6: Community Support
    (Stellar Solutions includes Stellar Foundation to support community engagement and QuakeFinder, a project to build and qualify algorithms to detect earthquake precursor signals)


  3. Leadership practices of the City of Fort Collins

    April 16, 2018 by ahmed

    fort-collins-quest18-leadership

    Originally posted on Blogrige by Christine Schaefer

    Five-Part Leadership Blog Series
    In this five-part blog series on the 2017 Baldrige Award recipients’ leadership presentations at the 30th Anniversary Quest for Excellence® Conference (April 8–11, 2018), senior leaders of the five new national role models share best practices and stories of how they achieved excellence.

    A City Rich in Relationships
    According to Fort Collins City Manager Darin Atteberry, his city is the fourth largest in the state of Colorado, with a current population of about 170,000 and expected growth to 250,000 in the years ahead. About an hour north of Denver, in the foothills of the Rocky Mountains, Fort Collins is “definitely a college town,” Atteberry added. “Colorado State houses about 30,000 students … 6,000 faculty and staff on campus, … , and we take very seriously our relationship with … Colorado State.”The city itself employs 2,400, with approximately $3 billion in assets (e.g., roads, buses, parks, government facilities). Considered a “full-service city,” Fort Collins provides typical municipal services such as parks and recreation, roads, transit, and police services, while also providing all four major utilities (water, wastewater, storm water, and electric power) to its community. It will soon add a fifth utility for the community: household and business Internet access through broadband service.Atteberry stressed that Fort Collins is not only in a “great location” but, also, that it has a legacy of great relationships. “We’ve inherited greatness. In the 130-plus years of this city, there’s really not a history of bad ethics or lack of integrity … we’ve inherited amazing leadership … we’ve inherited amazing relationships between our residents and our local government,” he said, mentioning the community’s repeated support for the city when enhancing facilities or enduring economic downturns.

    “Local Government Can Be Great”
    In sharing the story of his city’s journey to excellence, Atteberry again stressed the belief he said he and his colleagues in the Fort Collins government share that “local government can be great”—an energizing conviction he also highlighted in his remarks at the ceremony where he accepted the city’s 2017 Baldrige Award. Atteberry realized the importance of this belief to his leadership of Fort Collins years ago while reading a Fast Company article that prompted him to ask himself, “What’s the one thing you believe that no one else believes?” A determination to demonstrate great government has evidently helped propel Fort Collins’ quest for excellence.

    Moving from “Trust Us” to Data-Driven
    During its pursuit of excellence, the city leadership moved from practices that reflected what Atteberry referred to as a “’trust us’ kind of government” to one that is “data-driven.” Therefore, today the city systematically measures its performance and publicly shares results. For this transition to fact-based management and fuller transparency, Atteberry credits the city’s use of the Baldrige Criteria for Performance Excellence, which he said helped city leaders “be more intentional in our alignment of planning [for] budgeting and putting systems in place.”

    Focus on Culture + Strategy = Results
    Atteberry’s leadership presentation also emphasized the importance of his organization’s culture and its focus on strategy in achieving desired results. Atteberry recited the city’s mission (“to provide world-class municipal services through operational excellence and a culture of innovation”) and vision (“exceptional service for an exceptional community”) as he affirmed that the city’s culture is built around its mission, mission, and values.

    Part of the city’s strategy, said Atteberry, “is to be crystal clear about what we plan to accomplish and how we plan to budget accordingly.” The city’s strategic planning (short- and long-term), budgeting, measurement and reviews, and work system planning are all organized around the following seven major outcome areas (which were developed collaboratively by citizens, business representatives, and city staff members):

    • Neighborhood Livability and Social Health;
    • Culture and Recreation;
    • Economic Health;
    • Environmental Health;
    • Safe Community;
    • Transportation; and
    • High-Performing Government.

    Leadership System Model
    As shown in the graphic above, the city’s leadership system incorporates its strategy, culture, and results. (This model was created in 2012 as an improvement based on feedback the city received when participating in Colorado’s state-wide Baldrige-based award program, Rocky Mountain Performance Excellence [RMPEx]).

    “This structure allows us to really focus our business and see some amazing results,” said Atteberry.

    Results
    At the outset of his presentation, Atteberry pointed out that Fort Collins was named “America’s Most Satisfied City” by Time magazine in 2014 based on Gallup survey results. At the end, he highlighted the favorable trend over the past decade in residents’ ratings of city government services. As he reported, the percentage of residents who ranked the overall quality of city services as being good or very good increased from 77 percent in 2008 to 90 percent during the most recent survey.

    “To me, the Baldrige framework really demonstrates the value of culture and strategy, and we’re really here [as a Baldrige Award recipient] … because of the amazing, amazing framework,” said Atteberry.


  4. Baldrige program again ranked among best for leadership training

    March 8, 2018 by ahmed

    leadership

    Originally posted on NIST

    The Baldrige Performance Excellence Program will be honored once again in 2018 for providing top-ranked leadership development programs. The Baldrige Program’s training offerings—annual Baldrige examiner training and the Baldrige Executive Fellows Program—were recently selected for 2018 Leadership Excellence and Development (LEAD) Awards for being among the best in the world.“While we are honored and thrilled to once again be recognized as among the top leadership development programs in the United States and across the globe, such recognition would not be possible without the support and engaged commitment of the Baldrige Award recipients and our amazing cadre of volunteers. We believe that the innovation and collaboration of our unique public-private partnership is at the root of such achievements,” said Baldrige Director Robert Fangmeyer.

    Within the LEAD Awards’ education category—with subcategories for “custom content programming with emphasis on human resources” and “custom content programming with emphasis on leadership/organizational development”—the Baldrige Program ranks first and fourth, respectively, for 2018.

    Presented by HR.com, the LEAD Awards recognize outstanding achievements in leadership development and programs in the areas of education, corporate, and individuals on a local to global scale. They have been given out for 35 years and cover more than 30 education-based categories, including master’s and PhD programs, custom content continuing education programs, and mentoring and manager programs. The LEAD judges used websites and customer rankings to make their determinations.

    This year’s award winners are highlighted in the February edition of Leadership Excellence Essentials. The Baldrige Program is the only state or federal government program to be recognized within its LEAD Award categories.

    A press release by HR.com states, “Prestigious leadership awards salute the world’s top leadership practitioners and programs and highlight their roles in developing their most important asset – their people.”

    Since 2011, the Baldrige Program has been recognized numerous times for the quality of its leadership development programs. For example, in 2016 and 2017, Baldrige examiner training was ranked first in its award category, above numerous universities, and the Baldrige Program itself earned recognition for its combined leadership development offerings (including its executive fellows program) by ranking in the top two or top three in all the award categories in which it was eligible. In 2015, before the categories changed to be wholly education-based, the Baldrige Program was ranked first in the government and military category.

    The Baldrige Program is a public-private partnership that raises awareness about the importance of performance excellence and cybersecurity in driving the U.S. and global economy; provides organizational assessment tools and criteria; educates leaders in businesses, schools, health care organizations, and government and nonprofit organizations about the practices of national role models; and recognizes those role models with the Baldrige Award.


  5. Finally, evidence that managing for the long term pays off

    February 26, 2017 by ahmed

     

    Originally posted on HBR by Dominic Barton, James Manyika, and Sarah Keohane Williamson

    Companies deliver superior results when executives manage for long-term value creation and resist pressure from analysts and investors to focus excessively on meeting Wall Street’s quarterly earnings expectations. This has long seemed intuitively true to us. We’ve seen companies such as Unilever, AT&T, and Amazon succeed by sticking resolutely to a long-term view. And yet we have not had the comprehensive data needed to quantify the payoff from managing for the long term – until now.New research, led by a team from McKinsey Global Institute in cooperation with FCLT Global, found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2001 across almost every financial measure that matters.

    HBR02

    The differences were dramatic. Among the firms we identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively, by 2014, and market capitalization grew faster as well. The returns to society and the overall economy were equally impressive. By our measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015. We calculate that U.S. GDP over the past decade might well have grown by an additional $1 trillion if the whole economy had performed at the level our long-term stalwarts delivered — and generated more than five million additional jobs over this period.

    Who are these overachievers and how did we identify them? We’ll dive into those answers shortly. But first, it’s worth pausing to consider why finding conclusive data that establishes the rewards from long-term management has been so hard — and just how tangled the debate over this issue has been as a result.

    In recent years we have learned a lot about the causes of short-termism and its intensifying power. We know from FCLT surveys, for example, that 61% of executives and directors say that they would cut discretionary spending to avoid risking an earnings miss, and a further 47% would delay starting a new project in such a situation, even if doing so led to a potential sacrifice in value. We also know that most executives feel the balance between short-term accountability and long-term success has fallen out of whack; 65% say the short-term pressure they face has increased in the past five years. We can all see what appear to be the results of excessive short-termism in the form of record levels of stock buybacks in the U.S. and historic lows in new capital investment.

    But while measuring the increase in short-term pressures and identifying perverse incentives is fairly straightforward, assessing the ultimate impact of corporate short-termism on company performance and macroeconomic growth is highly complex. After all, “short-termism” does not correspond to any single quantifiable metric. It is a confluence of so many complex factors it can be nearly impossible to pin down. As a result, despite persistent calls for more long-term behavior from us and from CEOs who share our views, such as Larry Fink of BlackRock and Mark Wiseman, the former head of the Canada Pension Plan Investment Board, a genuine debate has continued to rage among economists and analysts over whether short-termism really destroys value.

    Academic studies have linked the possible effects of short-termism to lower investment rates among publicly traded firms and decreased returns over a multiyear time horizon. Ambitious work has even attempted to quantify economic growth foregone due to cuts in R&D expenditure driven by short-termism, putting it in the range of about 0.1% per year. Other researchers, however, remain skeptical. How, they ask, could corporate profits in the U.S. remain so high for so long if short-termism were such a drag on performance? And isn’t the focus on quarterly results a natural outgrowth of the rigorous corporate governance that keeps executives accountable?

    What We Actually Measured — and the Limits of Our Knowledge

    To help provide a better factual base for this debate, MGI, working with McKinsey colleagues from our Strategy & Corporate Finance practice as well as the team at FCLT Global, began last fall to devise a way to systemically measure short-termism and long-termism at the company level. It started with developing a proprietary Corporate Horizon Index. The data for this index was drawn from 615 nonfinance companies that had reported continuous results from 2001 to 2015 and whose market capitalization in that period had exceeded $5 billion in at least one year. (We wanted to focus on companies large enough to feel the potential short-term pressures exerted by shareholders, boards, activists, and others.) Collectively, our sample accounts for about 60%–65% of total U.S. public market capitalization over this period. To further ensure valid results and to avoid bias in our sample, we evaluated all companies in our index only relative to their industry peers with similar opportunity sets and market conditions and tracked them over several years. We also looked at the proportional composition of the long-term and short-term groups to ensure they are approximately equivalent, so that the differential performance of individual industries cannot bias the overall results, and conducted other tests and controls to ensure statistical robustness. (For more on our methodology download the full report.)

    One final caveat: While we firmly believe our index enables us to classify companies as “long-term” in an unbiased manner, our findings are descriptive only. We aren’t saying that a long-term orientation causes better performance, nor have we controlled for every factor that could impact the relationship between those two. All we can say is that companies with a long-term orientation tend to perform better than similar but short-term-focused firms. Even so, the correlation we uncovered between behaviors that typify a longer-term approach and superior historical performance deliver a message that’s hard to ignore.

    To construct our Corporate Horizon Index, we identified five financial indicators, selected because they matched up with five hypotheses we had developed about the ways in which long- and short-term companies might differ. These indicators and hypotheses were:

    • Investment. The ratio of capex to depreciation. We assume long-term companies will invest more and more-consistently than other companies.
    • Earnings quality. Accruals as a share of revenue. Our belief is that the earnings of long-term companies will rely less on accounting decisions and more on underlying cash flow than other companies.
    • Margin growth. Difference between earnings growth and revenue growth. We assume that long-term companies are less likely to grow their margins unsustainably in order to hit near-term targets.
    • Earnings growth. Difference between earnings-per-share (EPS) growth and true earnings growth. We hypothesize that long-term companies will focus less on things like Wall Street’s obsession with earnings-per-share, which can be influenced by actions such as share repurchases, and more on the absolute rise or fall of reported earnings.
    • Quarterly targeting. Incidence of beating or missing EPS targets by less than two cents. We assume long-term companies are more likely to miss earnings targets by small amounts (when they easily could have taken action to hit them) and less likely to hit earnings targets by small amounts (where doing so would divert resources from other business needs).

    After running the numbers on these indicators, two broad groups emerged among those 615 large and midcap U.S. publicly listed companies: a “long-term” group of 164 companies (about 27% of the sample), which were either long-term relative to their industry peers over the entire sample or clearly became more long-term between the first half of the sample period and the second half, and a baseline group of the 451 remaining companies (about 73% of the sample). The performance gap that subsequently opened between these two groups of companies offers the most compelling evidence to date of the relative cost of short-termism — and the real payoff that arises from managing for the long term.

    Trillions of Dollars of Value Creation at Stake

    To recap, from 2001 to 2014, the long-term companies identified by our Corporate Horizons Index increased their revenue by 47% more than others in their industry groups and their earnings by 36% more, on average. Their revenue growth was less volatile over this period, with a standard deviation of growth of 5.6%, versus 7.6% for all other companies. Our long-term firms also appeared more willing to maintain their strategies during times of economic stress. During the 2008–2009 global financial crisis, they not only saw smaller declines in revenue and earnings but also continued to increase investments in research and development while others cut back. From 2007 to 2014, their R&D spending grew at an annualized rate of 8.5%, greater than the 3.7% rate for other companies.

    Another way to measure the value creation of long-term companies is to look through the lens of what is known as “economic profit.” Economic profit represents a company’s profit after subtracting a charge for the capital that the firm has invested (working capital, fixed assets, goodwill). The capital charge equals the amount of invested capital times the opportunity cost of capital — that is, the return that shareholders expect to earn from investing in companies with similar risk. Consider, for example, Company A, which earns $100 of after-tax operating profit, has an 8% cost of capital and $800 of invested capital. In this case its capital charge is $800 times 8%, or $64. Subtracting the capital charge from profits gives $36 of economic profit. A company is creating value when its economic profit is positive, and destroying value if its economic profit is negative.

    With this metric, the gap between long-term companies and the rest is even bigger. From 2001 to 2014 those managing for the long term cumulatively increased their economic profit by 63% more than the other companies. By 2014 their annual economic profit was 81% larger than their peers, a tribute to superior capital allocation that led to fundamental value creation.

    No path goes straight up, of course, and the long-term companies in our sample still faced plenty of character-testing times. During the last financial crisis, for example, they saw their share prices take greater hits than their short-term counterparts. Afterward, however, the long-term firms significantly outperformed, adding an average of $7 billion more to their companies’ market capitalization from 2009 and 2014 than their short-term peers did.

    While we can’t directly measure the cost of short-termism, our analysis gives an indication of just how large the value of what’s being left on the table might be. As noted earlier, if all public U.S. companies had created jobs at the scale of the long-term-focused organizations in our sample, the country would have generated at least five million more jobs from 2001 and 2015 — and an additional $1 trillion in GDP growth (equivalent to an average of 0.8 percentage points of GDP growth per year). Projecting forward, if nothing changes to close the gap between the long-term group and the others, then the U.S. economy could be giving up another $3 trillion in foregone GDP and job growth by 2025. Clearly, addressing persistent short-termism should be an urgent issue not just for investors and boards but also for policy makers.

    Where Do We Go from Here?

    Our research is just a first step toward understanding the scope and magnitude of corporate short-termism. For instance, our initial dataset was limited to the U.S., but we know the problem is a global one. How do the costs and drivers differ by regions? Our sample set consists only of publicly listed companies. How do the effects we discovered differ among private companies or among public companies with varying types of ownership structures? Are there metrics that can help predict when a company is becoming too short-term — and how do they differ among industries? Most important, what are the interventions that will prove most effective in shifting organizations onto a more productive long-term path?

    On this last point, we and many others have identified steps that executives, boards, and institutional investors can take to achieve a better balance between hitting targets in the short term and operating with a persistent long-term vision and strategy. These range from creating investment mandates that reward long-term value creation, to techniques for “de-biasing” corporate capital allocation, to rethinking traditional approaches to investor relations and board composition. We will return to HBR in coming months with more data and insights into how companies can strengthen their long-term muscles.

    The key message from this research is not only that the rewards from managing for the long term are enormous; it’s also that, despite strong countervailing pressures, real change is possible. The proof lies in a small but significant subset of our long-term outperformers — 14%, to be precise — that didn’t start out in that category. Initially, these companies scored on the short-term end of our index. But over the course of the 15-year period we measured, leaders at the companies in this cohort managed to shift their corporations’ behavior sufficiently to move into the long-term category. What were the practical actions these companies took? Exploring that question will be a major focus for our research in the coming year. For now, the simple fact of their success is an inspiration.