The way a CEO writes emails and letters to shareholders can eventually help in predicting how the company will perform. Surprised? Professors Tuck Siong Chung, ESSEC Asia-Pacific, and Angie Low, Nanyang Business School, share their research into what makes CEOs decide on the short-term or long-term.
Short-term or Long-term: What makes a CEO decide? by CoBS Editor Muskan Chourey with Tom Gamble. With kind acknowledgements to Tuck S. Chung. Related research: CEO regulatory focus and myopic marketing management, Tuck Siong Chung, Angie Low; Internal Journal of Research in Marketing, Elsevier.
The Modern CEO’s Dilemma
A CEO is expected to deliver desirable near-term outcomes while playing in the long-haul. And more often than not, the demand to create short-term value and long-term value by a company in any industry contradicts each other. It is undoubtedly challenging to look forward and manage the operations over a long-term horizon in the ever-changing industrial world.
Adding further to this complexity is the fact that, often, the goal of improving the firm’s performance is achieved after the CEO’s tenure is over. In this case, the outcomes cannot be directly mapped to the CEO. With the initial impression that CEOs underperform their successors.
This leadership challenge is well-known to all business leaders and addressing it ethically requires a deeper understanding of what goes on in the heads of the top management. The considerably less concrete research on how CEOs think calls for a dedicated study of their personality traits and their impact on the company’s performance.
This is what Profs. Tuck Siong Chung and Angie Low decided to do by conducting a textual analysis of company documents to infer CEOs’ psychological traits and relating it to the firm’s performance. They highlight how essential it is to consider the applicant’s psychological attributes before hiring them as the CEO while exploring the burgeoning and increasingly relevant topics of regulatory focus theory and marketing myopia.
Let’s take a quick look at each of these to understand how they relate to the performance of the CEO, and eventually the company.
Play to Win vs Play Not to Lose
Imagine that two of your friends have enrolled in the same training program as you. You ask them about their motivation to build up their skills sets. Joel states that he wants to upskill himself and improve his quality of life – one day he decided that he wanted to move onwards and upwards the corporate ladder and left his job to realize his vision of an ideal life by advancing his knowledge. On the other hand, Emma says she is here to financially secure her future and support her family. She directly applied for the training course after her university studies as the layoffs during the pandemic made her wonder about her employability without increased practical skills.
Now, let’s look at their motivation, decision-making, and end goals. Even though their end goal is the same – certification with flying colors – their motivations and decisions they take during their course will be far from the same. What primarily motivated Joel was his desire to maximize gains. He was more open to taking risks and is likely to take them in his upcoming training and professional journey. Your other friend Emma is more concerned about minimizing losses as opposed to making gains and will probably avoid experimenting with her newly acquired skills and stick to the traditional path.
They both got accepted onto the prestigious training course so both mindsets have some merits. But is there a definitive way to know which method is better in a specific situation when two people are motivated by contrasting things and follow different paths?
What factors make CEOs lose sight of the long-term?
Profs. Chung and Low attempt to answer the question by using something they call Regulatory Focus Theory. This describes how a person pursues their goals depending on their own values and beliefs and centres around two motivations – promotion and prevention. As such, a promotion-focused person will be motivated to pursue opportunities for gains. And a prevention-focused person will be motivated to avoid making errors that result in losses. Coming back to our previous example, Joel would be happy after his certification if he becomes a better version of himself and Emma would be happy if she doesn’t end up being unemployed.
The very nature of the marketing field also has an impact. Some industries – formerly considered to be growth industries – are now on the verge of downfall. And one of the reasons for this is the pattern of compromising on the long-term value creation by focusing on activities that provide instant gratification. For the period 1996 to 2018, this short-termism resulted in a whopping loss of $79bn in annual earnings at S&P 500 firms.
The problem is that this short-sighted decision-making cascades into the marketing department of a company and prompts them to manage their marketing only for the present instead of preparing for the future. Chung and Low term this myopic marketing management and it is adopted by companies to keep up with stock market pressure and avoid reporting an earnings shortfall.
The Means and the Ends
So how are these two interrelated and would it help us solve the CEO’s dilemma to balance long-term and short-term strategic decision-making?
Professors Chung and Low find that the tendency of engaging in myopic marketing management increases when CEOs are faced with the pressure of meeting short-term earnings expectations. As such, promotion-focused CEOs aim to benefit from the increase in stock price (even though it is temporary) while prevention-focused CEOs, being more risk averse, are less likely to fall into this quick gains trap.
Beyond these topics, Chung and Low also consider the compensation structure of the CEO and the business environment in which they operate. They found that equity-based compensation reduces the chances of myopic marketing management by promotion-focused CEOs as it helps promote a refocus on long-term firm value. Prevention-focused CEOs’ tendencies toward myopic marketing management however are indifferent to such a compensation structure.
Looking back to Emma’s story, the pandemic acted as an external factor and probably pushed her more toward going for specialized training immediately. While in the C-Suite context this may or may not have been the right choice for her, Profs. Chung and Low conclude that environmental turbulence in the industry often leads to less myopic marketing management by the predominantly prevention-focused CEO. In this light, firms operating in uncertain business environments should consider hiring prevention-focused CEOs.
So next time you watch a CEO’s TED Talk, why not pay close attention to how they structure their sentences to understand if they are prevention or promotion focused? And when you come across any newly launched marketing initiative, think about its long-term sustainable value creation. Have the CEO and their marketing gurus been myopic or visionary?
Useful links:
- Link up with Profs. Tuck S. Chung and Angie Low on LinkedIn
- Read a related article: The CEO’s journey to sustainability
- Discover ESSEC Business School Asia-Pacific, Singapore
- Apply for the top-ranked ESSEC-Mannheim EMBA and study on the Singapore campus.
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