Today’s business leaders need to resist prioritizing short-term gains over long-term objectives. David M. Cote, executive chairman of Vertiv Holdings Co. and former CEO of Honeywell, can speak from experience that the balance of short-term and long-term objectives is essential and achievable.
HR People + Strategy: How can leaders pursue strong short-term results while also boosting long-term results?
David M. Cote: You can’t accomplish both short-term and long-term unless you develop income flexibility. That means being able to deliver more in the short-term while still investing in the long-term. For example, if peers are on average committing to a 7 percent earnings increase, you need to commit to 8 percent and have a plan to deliver 9 percent while still investing.
The best way to do this is to grow sales while holding fixed costs constant. All costs are either variable, as in they rise and fall with volume, or are fixed, as in they don’t change much with volume. Variable margin, often call contribution margin, is different by business and industry but is generally greater than 40 percent. So if sales grow just 3 percent and fixed costs don’t grow, the fall-through to income is significant and generates lots of flexibility.
Fixed costs are generally largely people related. With the same census and assuming 3 percent annual inflation, sales need to grow 3 percent to hold margin rates. Holding fixed costs constant (or at least growing less than sales) means fewer people. The best way to achieve that is with ongoing process improvement leading to more efficient and effective processes.
HRPS: How can leaders spot short-term processes that will damage long-term results?
DC: Whenever people are straining mightily to “make a quarter,” that’s the indication. It’s important to look for detrimental ways people are “making it.” Examples would be booking gains from accounting changes (income but no cash), distributor loading at the end of the quarter by offering special pricing or payment terms, cutting special deals with suppliers where they make a payment up-front that is booked as income, or cutting funding for long-term seed planting projects.
HRPS: What methods should leaders use to determine the best ways to pursue growth?
DC: Get all of the facts and opinions on the table and involve your whole staff. Ensure everyone contributes to the discussion. Introverts and extroverts participate differently so ensure you solicit thoughts from everyone. Once you have had a good general discussion and ensuring it doesn’t lead to conclusion, then break the group into at least three small groups to hash out the question separately for at least a few hours. Then get all the groups together to report out. Amazing what this technique does to avoid group think! Then you can have a good general discussion.
HRPS: What role does culture play in results—short and long term?
DC: Sustainability of results comes from the culture. A high-performance culture recognizes significance of achieving short-term results while still seed planting. It starts with the right mindset in leaders, and the leadership has to walk the talk. If after espousing a short-term/long-term approach, leader actions belie what the leader has been saying, the organization (and the culture) will follow the actions.
HRPS: How can executives balance the stakeholder groups influencing desire for short-term results: investors, media, managers, employees, etc.?
DC: We can’t let stakeholder focus be an excuse for non-performance for shareowners. Performance for the owner still has to be the priority but to be successful for the owner means making the right decisions for customers, communities and employees at the same time. During the 16 years I was at Honeywell, while we increased market capitalization from $20 billion to $120 billion, we also contributed $5 billion to our employee pension plans, spent $3.5 billion to resolve all of the environmental issues a 100-year-old chemical company will have, and improved considerably our health and safety record. It is all doable and companies have a license to operate from society, so all stakeholders have to be considered, but also recognize it is not an excuse for mediocre financial performance.
HRPS: How should leaders address crises and downturns to position the business in the best manner?
DC: This current recession is different in that there was an employee health issue, that has to be addressed first. Then, several suggestions—first, leaders can’t panic, which may sound obvious to state but is not obvious in practice. The second is to think independently. Thinking independently is a lot more rare than being smart. Avoid herd thinking from the media or your own organization and think for yourself. Third is to stay focused on doing a great job for your customers. Fourth is in the depth of the recession, start planning for recovery. Recovery does come regardless of what the herd may think. Keep funding your growth seed planting investments for the future. Use furloughs and benefits reductions wherever you can to reduce labor costs instead of layoffs so when recovery comes, you have the people to support it. Start working with suppliers early so they can support your growth. By doing these things you take control of the downturn to build advantages over competitors even during tough times.
HRPS: What personal processes can leaders adapt to build their leadership skills?
DC: The biggest personal process is to build your own self-awareness and focus on being a learner. You became a leader because of your strengths, but the higher you go, the more your issues will limit you. We all have issues of some kind, so a leader has to figure it out. A 360-review can be helpful, also appraisals. I always suggested taking all of the comments and putting it in a 4 block—good advice, bad advice, take the advice, reject the advice.
Not all the advice you get will be correct and that’s why the introspection is important. It’s not easy. This I know because it took me a couple of decades to finally recognize some of mine…even though I had been told!