In the eyes of some entrepreneurs, getting an IPO (initial public offering) represents a crowning achievement. But for all its benefits, being listed has its drawbacks. The company’s valuation criteria will change. There will me more emphasis on short term predictability than on long term future growth potential.
Companies such as Boeing and Dell experienced this first hand. In an effort to increase the stock return both companies maximized RONA (return on net assets) at the expense of future growth. Boeing’s 787 Dreamliner project was delayed by 4 years and ended up costing the company $26 billion more than the initially estimate. Similarly, in Oct. 2013, in an effort to reignite growth, Dell went private after being listed for 25 years.
Furthermore, the pressure of being measured on short term financial metrics, impacts companies’ workforce diversity. Research shows that diverse teams are more likely to come up with breakthroughs that can secure long term future growth potential. Whereas homogeneous groups will deliver incremental but mercifully predictable improvements that translate into steady improvements in the stock price making the shareholders happy.
Investing primarily in incremental innovation will offer the predictable short-term outcomes that stock analysts desire. However, this strategy will most likely fail to make the company resilient in the face of disruption from exponential competitors. Moreover focus on short term predictable outcomes will impact the diversity in the company.
It is understandable that established companies, with an eye on the bottom line are measuring performance using traditional KPIs such as RONA, ROI or NPV because all of this metrics are based on the notion that financial capital is the only scarce resource that corporations need to manage.
But in a world in which competition advantage depends on a company’s ability to prioritize innovation and long-term growth, these measures no longer provide a good guide.
If innovation and increased potential of breakthroughs are the scope, than we should start adding on our library of metrics future or long term oriented performance criteria such as for example: portfolio distribution, time to market and net presenter score.
Portfolio distribution could indicate the risk of disruption the company finds itself under. Companies investing across all three areas of the innovation ambition matrix are more likely to sustain growth than companies investing only in core. Although looking through a short term lens, buying stock from in a company ‘distracted’ by other investments than core might not sound wise – in the long term this might pay off. This was the case with Google’s investment in Android in 2008. Back then Android represented a transformational investment for the company drawing most of its revenue from the search engine. Today, 10 years after the first release, Android has more than 80% market share in mobile operating systems. Deliberately counterbalancing core investments with transformational investments has the potential to impact workforce diversity too. Whereas transformational ideas are more likely to come from heterogeneous teams.
Further evidence supporting the fact that portfolio distribution impacts both diversity and growth, is a study done on over 4,000 spanish companies. The study found that companies with more women in R&D had a higher likelihood of introducing breakthrough innovation to the market.
Another non-financial KPI that can aid understanding of a company’s ability to grow is time-to-market. If companies were to be measured on the time it takes to launch an idea they will eventually start optimizing for diversity too. They’ll do this based on the fact that (cognitive) diverse groups are faster at gathering facts in complex and highly uncertain situations than homogenous ones. A company’s time-to-market is a good indicator for its cost of innovation. The longer it takes to launch a product the higher the cost of that product will be, plus the product might come out at a time when market trends have shifted. Having this as a chronic issue will negatively impact the company’s profit.
In the startup world, time-to-market is more crucial than in the corporate world. For startups – which have one single product in their portfolio – a shorter time to market increases the likelihood of survivability as it directly impacts cash flow. In the case of corporations where the cash flow is ensured by other legacy business models in the portfolio, new products can stay under development for years before they are released. This was the case of Zune. The MP3 player was Microsoft’s attempt to counteract Apple’s iPod. Development started shortly after Apple released the first generation iPod in 2001 but it took Microsoft almost 5 years to launch the first Zune. By the time Zune hit the shelfs the iPod had almost total market dominance, with about 80% of the market share. After burning tens of millions of dollars on advertising, in 2012 Zune was discontinued failing to turn the tables on the iPod.
Another example of a performance indicator not aggregated in the stock price is the net promoter score. A company’s NPS is not reflected in its share price but has direct impact on the company’s bottomline, and can serve as good yardstick for diversity too. The NPS is a measurement gauging the loyalty of a firm’s customer relationships. This indicator sends a powerful signal regarding a company’s potential future success, as its main purpose is to measures the likelihood of repeat business. Experts suggest that diverse teams that are a direct reflection of a company’s customer base creates a deeper understanding of customer needs. Hence increasing the opportunities to form a personal connection. In other words, heterogeneous teams improve a company’s ability to serve a wider spectrum of customers – which if done right will be visible in the NPS score. And that trickles into a strong bottom line.
Solutions beyond quotas
In spite of all the attention diversity is getting these days, we have to admit that there is still a long way to go. As of May 2018, there were only 24 female CEOs in Fortune 500 companies—or just under 5% of the total list. And the African-American demographic is faring even worst, with only 3 CEOs on the scoreboard (0.6%).
Shifting the way corporate performance is measured might have a direct impact on diversity. A shift from a short term view on performance to a long term one (or a bifocal measurement system) has the potential to trigger a change in diversity. But relying solely on firms’ voluntary adoption of a new system has little chance of success. Hence awareness building and projects like The Long Term Stock Exchange have the potential of having an impact – not only on the way we measure a business but also on the people working there. Understanding a possible root-cause of the lack of diversity in listed companies might offer the insight needed to come up with sustainable solutions that stretch beyond gender or race quotas. The popular mantra, what you can measure you can manage, is true. As a society we succeed at improving only the things we measure, so measuring what we value, will make us change.