Down with short-termism

by 11 Nov 2008

As the economic downturn continues to batter some Australian organisations, executives are looking to cut costs and still hit their numbers through the last quarter of the year.

While some sectors such as engineering, mining and healthcare are less affected by the downturn and are still hiring professionals with the right skills, other sectors such as banking and finance have taken a major hit while retail, real estate and manufacturing are increasingly vulnerable.

Banking and finance has been hardest hit, with a number of companies implementing retrenchments or seeking advice on how to best go about redundancies and outplacement. As the economic downturn becomes more widespread, a number of other sectors are also taking the same approach.

While companies do need to contain costs in order to make it through rough economic times, the danger in this is that executives and finance can sometimes take a knee-jerk reaction to market conditions. This short-term thinking is, to be frank, plain stupid. While the balance sheet will look better for a few months, the long-term damage that can be done to a company through such thinking is potentially significant.

It is people who are behind the productivity and profit of a company; companies don’t just magically make money.

While boards can be afraid of negative shareholder reactions in the face of downgraded profit forecasts, and rightfully so, they should be more afraid of cutting too hard and deep if retrenchments are called for. Fortunately, executives and finance departments who are short-term in their thinking appear to be in the minority (see ‘Navigating the retrenchment road’ on page 20).

A much smarter and more sustainable approach is to think about the long-term business plans, and the skills and talent required to achieve these. This is the responsible approach. Every economic downturn will eventually pass, and the sustainability of a company and its ability to make money (or more accurately, the ability of its people to make money) is what matters.

Short-termism is notoriously entrenched in some companies. However, when it comes to cutting people, it is these kinds of companies that will suffer in the long run.