Honest to Greatness

Finance: Investing Like Buffett in Long-Term Honesty

And Training for a Marathon, Even If You Sprint

Our world has rules about finance and accounting. We’re not allowed to cook the books, like Enron, or misreport earnings, like . . . well, countless companies. It should be eminently obvious that honesty and finance should be tied tightly together in an unbreakable bond.

Of course, given the financial crisis of 2008, we all know that’s not the way it is. Since that time, it’s been difficult to assign blame to any one party. Was it the money-hungry banks that wanted to create more loans? The regulators who didn’t do enough to protect consumers? The ratings agencies that said it was OK to bury subprime loans into otherwise highly rated debt instruments? Homebuyers with pie-in-the-sky dreams but cupcake-sized credit? I have another idea: the honest culprit of the 2008 financial crisis was simply our short-term thinking about business finance and investing.

IF YOU WANT LONG-TERM SUCCESS, BE HONEST ABOUT WHAT IT TAKES

Sadly, a powerful group of Wall Street influencers may be working to prevent honest change: analysts and professional investors who exclusively focus on quarterly results and consistently downplay companies that can’t show that their quarterly investments will produce quarterly profits. For a publicly traded company, even those ranked by the JUST 100, taking care of all stakeholders—employees, customers, communities, and so on, in addition to shareholders—can take too long. Or worse, caring for all stakeholders can be seen as an investment that exists on an incalculable time horizon in the eyes of short-term investors. Who’s left to look up at the long-term consequences of a systemic issue when everyone is busy looking down at their next few profitable steps?

In a world where short-term profits are everything and looking for long-term sustainability will get you angry questions at your investor meeting, it’s not difficult to see how a financial crisis would inevitably arise. So how do we get honest about what it takes to create sustainable long-term business success instead of focusing on the short term to our own collective peril?

There is one successful businessman and shareholder of myriad companies who just so happens to be obsessed with long-term financial thinking. We can look to him for guidance. You may have heard of him; his name is Warren Buffett.

Buffett likes quarterly reports just fine as an investor interested in the performance of his stock holdings, but he has consistently stated that the ritual of providing quarterly guidance is “a very bad practice” and a “game” that puts CEOs in the impossible position of estimating business performance in a ridiculously short window. Jamie Dimon, CEO of JPMorgan Chase & Co., shares Buffett’s concerns, saying that quarterly forecasts can “often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things they wouldn’t otherwise have done,”¹ like take dishonest shortcuts to avoid a stock-crashing catastrophe.

Here’s some disheartening proof: in 2008, Verizon lost over $10.6 billion in its employee pension fund during the financial crisis, which left its pension plan underfunded by over $2.6 billion.² In other words, Verizon had less money than it needed to ensure the company could pay the pensions of every employee to whom it had made that retirement promise. And yet, in 2008, despite losing more than $10 billion, Verizon recorded a net income on its pension obligations in the amount of $341 million.

Quarterly forecasts can “often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things they wouldn’t otherwise have done.” —Jamie Dimon, CEO of JPMorgan Chase & Co.

How is it possible to lose billions of dollars and still record a net gain? Without going too much into the complexities of corporate accounting, the basic premise is this: an accounting rule allowed companies to record an “expected return on plan assets” instead of recording the actual performance, and then gave companies the ability to record the expected return number as an operating income or expense that could positively influence the bottom line. When companies could use the expected return, less interest on the obligation, to influence the operating income or expense from quarter to quarter, they had little incentive to think long term about building up pension reserves to insure against future volatility, like we saw during the financial crisis. Fortunately, the accounting rule recently changed here in the United States, which might help companies make different forecasting decisions to insure their obligations over the long run.³

Unfortunately, the phenomenon of short-term thinking isn’t confined to the enterprise sector. When the agency I cofounded was unable to grow a client’s business, it was sometimes because the client was afraid of enduring short-term adjustments in the name of long-term success. This fear prevented those execs from taking the kind of bold action that Domino’s and Charlotte McCourt took. Instead, they chose to remain dishonest about what was going on around them in favor of the status quo, even if it meant their staid organizations were slowly being put out of business. On the contrary, clients who were willing to pursue the truth and embrace the honest need to evolve achieved extraordinary results, gained unexpected acclaim and prestige, and positioned themselves for long-term success while their competitors were forced to play catch-up.

SPRINT’S LONG GAME: HOW TO USE HONESTY TO CREATE LASTING PROFITS

Every honest CEO in the world agrees that long-term performance is better for business than short-term success alone; yet our departments, organizations, and even stock market are set up to embrace short-term thinking (no wonder we end up with long-term ill effects, like climate change). To understand how we can begin to embrace a long-term mentality, I turned to Dan Hesse, former CEO of Sprint. Hesse managed to take a telecom company that was hemorrhaging customers and turn it into a strong competitor that gave investors a roughly 30 percent higher return than the roaring S&P of the post-financial-crisis era and a nearly 50 percent higher return than Sprint’s telecom competitors. That’s a decent outperformance, but it becomes downright heroic when we consider that, when Hesse inherited Sprint in 2007, the company was weeks away from filing for bankruptcy. The Nextel merger had left Sprint with an older network that consistently dropped calls at a time when every provider was racing to capture customers by luring them with better call quality. Sprint skirted bankruptcy for a time, until Hesse forced Sprint into a potentially catastrophic situation when he decided that the entire infrastructure needed to be overhauled and the aging Nextel technology would have to be shut down.

Going into that impossible decision, Hesse had already helped Sprint rise to become the most improved company in the United States out of all forty-seven industries listed in the American Customer Satisfaction Index.⁴ Sprint had gone from last to first in the telecom industry for customer service, and pretty soon it was onboarding customers faster than anyone else in the industry.⁵ “But,” Hesse admitted to me, “we knew from a long-term point of view that our network wasn’t going to grow with us. There had been lots of mergers and none of our networks worked together, and we knew we didn’t have the bones. We needed to rip out the entire network and start from scratch, which would take two years of construction.”

For most CEOs that’s a death knell, because the short-term-focused analysts on Wall Street would only see nosediving profits as the company poured money into a yet-uncertain future. Even though we know that investing in the long term is honestly the best business decision to make, a J curve of losses happens when we decide to take short-term pains in exchange for long-term gains.

Buffett would agree. His method is to buy and hold stocks for incredibly long periods of time, and to do little else during that time but sit back and watch all the frenzy happen while his companies keep chugging along, compounding tidy profits.

Netflix knew this, which is why Netflix decided to blow up its movies-through-the-mail business to build a hellaciously expensive streaming video platform. “Netflix’s business results took a dip and they took a lot of crap for a while for going off in that direction,” Hesse pointed out. As we learned earlier, if Carl Icahn had believed in the power of long-term thinking, we might have been talking up Blockbuster instead of Netflix. And, just as Reed Hastings and company did with Netflix, Hesse made the long-term investment in Sprint because it was honestly what the business needed if it were to survive past Hesse’s tenure. It wasn’t the move that would make him personally wealthy in the short term. It wasn’t the move that would satisfy the analysts on Wall Street or the pundits on cable news. As Hesse admitted, though, “You’ll never get to the promised land unless you’re willing to take the dip, and that takes a lot of courage for a CEO to think that long term. But a lot of being honest and doing the right thing is about taking the long-term view.”

When investors can come in and out of a stock within a matter of seconds, we can’t expect everyone to take a long-term view while their investment portfolios sag before their eyes. That’s actually why Buffett keeps the price of Berkshire Hathaway’s stock so high; he wants people to invest and stay for the long term, right alongside him.

Unfortunately, our system isn’t set up to think long-term. When investors can come in and out of a stock within a matter of seconds, we can’t expect everyone to take a long-term view while their investment portfolios sag before their eyes. That’s actually why Buffett keeps the price of Berkshire Hathaway’s stock so high; he wants people to invest and stay for the long term, right alongside him. The long-term mentality is that important to his understanding of what makes a business successful. If we think he’s at all correct, it means that, as business leaders, we have a serious responsibility to think like Buffett instead of like short-term investors—whether it means rebuilding a network infrastructure, investing in a bold-but-honest marketing campaign, or perhaps starting that side hustle you dream of but can’t seem to work on in the short term for your own long-term benefit.

HOW COURAGEOUS LEADERS DERISK THEIR INVESTMENTS USING HONESTY

No matter what you’re investing in—a new business, a new product, a new future for your organization, or yourself—you can greatly derisk any investment by gaining more of the right kind of knowledge. When leaders go wrong, it’s usually either because they’ve already decided on a subconscious level that it’s easier to drift along with the status quo than truly innovate, or they’ve convinced themselves that they need near-perfect information before moving forward. The truth is, none of us ever have the absolute perfect amount of information. Instead, we have to be honest enough to know where the right information lives, and know when enough of the right information is enough.

Hesse had no guarantees that his strategy would work. Given Sprint’s aging infrastructure, it was only a matter of time before the wireless giants swooped in to eat his lunch. Faced with certain (eventual) death or uncertain life, he chose to invest in the future of Sprint and give it the best possible chance for survival. In some ways, Hesse was lucky to be forced to act by the impending doom staring him in the face. Even so, lesser leaders might still have chosen to ignore the threat. Unfortunately, disruption—like death—is coming for us, whether we can visibly spot it or not.

So how do the best leaders know when to move forward? First, they properly assess that creating long-term success means innovating, changing, and investing in the future as a matter of habit. Then they derisk their decision by getting just enough of the right knowledge to be confident. Typically I find that the clients we work with already have the insights they need, or they’re just a few key conversations away from getting the right insights. The right insights are usually locked up in a question we repeat to ourselves but never stop to answer. The answers are usually stuck in a belief we tell ourselves but never fully explore to see whether or not it’s true.

For example, in my own case, it took my business partner and I years to figure out an odd paradox we would encounter in some prospective clients. Our favorite clients hire us to act as their CMO, in which case we work together to mine the insights, create the strategy, and fully execute the growth plan. But sometimes we’d also get requests to act as a fulfillment house for marketing projects, like producing collateral, blogging, creating social media content, and more, which was also just fine with us. But here’s what we found: prospects who were only interested in us producing marketing content verbally expressed their interest in quality but actually wanted more, fast, cheap, and then quality, in that order. The truth was hiding in plain sight for us—in our conversations, in our prospects’ buying habits, and in our prospects’ questions. All we had to do was set aside our bias about putting quality first and then get honest about what we were hearing. That’s when we realized we had an opportunity to evolve.

From there we made the decision to invest in a new platform—Stradeso, a company we grew out of our agency, which became its own business. We moved confidently forward because we had the right information. At the community level, organizations of all types and sizes need more and more content, quickly and affordably and of a respectable quality. On the level of others, VPs of marketing, CMOs, consultants, entrepreneurs, and agencies have a problem: they can’t get marketing content without going through an HR headache and hiring someone, be it another agency, a freelancer, or an employee. Finally, we only needed to get honest with ourselves and be willing to look at ourselves as something other than a marketing agency. Suddenly we were able to see that we could create a technology solution to give customers the combination of benefits they needed: more, fast, affordable, quality. It would have been far easier to do nothing, remaining solely a marketing agency and continuing to live in our comfort zone. Instead, we took on some short-term pain investing in a new technology in order to create a long-term organization that will (hopefully) continue thriving in the gig economy.

By the way, if it works, it’ll put our agency out of business. And that’s exactly the point.

HOW SMART COMPANIES USE HONESTY TO POSITION THEMSELVES FOR FUTURE SUCCESS

If you want to position your organization for future success, the key isn’t just to embrace honesty. Instead, it takes embracing honesty before you’re forced to, because if you let your competitors get there first, you aren’t leading and likely never will.

Case in point: America’s Test Kitchen, which started as a New England cooking magazine in 1993 and evolved into a global brand with almost twenty television seasons in two branded shows, three magazines, more than twenty cookbooks, a variety of websites, over five seasons of radio shows, a cooking school, and seven Emmy nominations (including one win in 2012). One of America’s Test Kitchen’s secrets is that it does not accept advertisements from the same companies it reviews—which is virtually every company that makes cooking-related products. This stance instantly kills an entire revenue model over which most entertainment brands would salivate. Instead, this honest brand staunchly avoids conflicts of interest, creating videos of employees smashing pans, torturing whisks, and otherwise beating the hell out of their cookware to give honest reviews to their ardent fan base. The result of creating long-term trust instead of grabbing at short-term profits is perhaps best exemplified by the four million routine viewers and seventeen thousand volunteer home cooks who help America’s Test Kitchen find “the right way” to cook, as defined not by them but by their own fans.

We’re wired for protection, which forms the basis of our fight-or-flight response. It’s easier to do nothing and slowly wither away than take bold action to survive a farflung future that we can sometimes barely picture.

Building economic models for the long term is common sense but far from common practice. And it’s up to us to recognize that our innate tendencies will lead us astray. We’re wired for protection, which forms the basis of our fight-or-flight response. It’s easier to do nothing and slowly wither away than take bold action to survive a farflung future that we can sometimes barely picture. But then again, things are different now. The future is rushing toward us much faster these days, and globalization, automation, real-time communication, and other markers of the twenty-first century will only accelerate our urgent need to keep pace.

For now, beware short-term promises. “This is why we have so many bad feelings toward companies, and why it’s often difficult for the CEO to do the right thing,” Hesse explained about the still-prevalent short-term quarterly focus. “I can guarantee you that long-term benefits are the last thing that any activist investor is focused on and wants the CEO doing—things like focusing on employees and customers. They are interested in profits—very short-term profits in very small windows of time, and there’s a tremendous amount of pressure there.”

Luckily, we may not have to wait very long for this shift from short-term to long-term thinking to prevail. “In speaking with some of the world’s top business leaders,” President Trump tweeted in August 2018, “I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six-month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!”⁶ With more and more CEOs and one Twitter-happy president joining Buffett’s call to arms, it’s only a matter of time before we put an honest end to short-term thinking for the benefit of long-term success.

QUESTIONS FOR HONEST REFLECTION

1.Do you and your organization have a clear picture of what your business should look like many years from now?

2.Have you heard of any spectacular ideas for innovation and growth within your organization that have been killed by managers who are only focused on the short term?

3.How might you begin to collect a list of long-term projects and create an action committee to review, select, and execute on those projects that are vital to your long-term success?