Thursday, December 29, 2016

Sustainable Long-term good for R&D, Patents and Profits

Here's exerts from the blog over at IPzine, a sister blog spot.

A recent study shows how long-term focus pays off. This study concentrated on switching the CEO compensation to longer-term. From that point forward, what happened, on average to several things related to the performance over time.

Great study was by Flammer and Bansal (2016) and summarized in the WSJ, CEOs should focus on the long term, a study says. Although the study is coming out soon in the Strategic Management Journal, you can find it here.

The researchers selected companies that were long-term focused based on those companies that had a long-term compensation package presented to the board that was narrowly approved. The narrowly approved implies that this was a bit of a surprise to the executives resulting, potentially, in a paradigm shift toward longer-term focus. The board voting was reviewed from 2005 through 2012 so that there would be room for performance analysis.

There are many positives related to long-term focus all around. Companies with a long-term focus do better all around (profits, net profit margin, sales, stock price, etc.). Those long-term focus had a statistically significant improvement over the longer term (2 years and longer). Interestingly, they had a small dip insignificant dip in the short term.

[Methodology and results related to patents is discussed here in the IPzine blog. There are lots of assumptions made about the close vote by the board to align compensation with long-term results in conjunction with the subsequent financial performance of these publicly traded firms. Patents were monitored to see how they cited past patents and the citations of the companies patents in the future. This gives a good proxy of the value of the patents and how revolutionary they are (to the firm).]

Verdict. Boards should focus on long-term for compensation. This means that they have to be willing to take lesser profits in the short term.

There are also very strong correlations to the KLD factors, collectively and all four components: employees, environment, consumers and society.
Verdict. Corporations should focus on sustainable, long-term targets for goals and for compensation.

They have some limitations to this study, but they also combine it with good literature support for long-term-centric management practices. And minimizing the principle-agent problem common to executive compensation.
We want everyone highly motivated by the long-term, sustainable success of businesses (& not-for-profits & Gov)...
Anything else is, well, short-sighted!

Azoulay P, Graff Zivin JS, Manso G (2011). Incentives and creativity: evidence from the academic life sciences. RAND Journal of Economics 42(3): 527–554.
Flammer, C., & Bansal, P. (2016). Does a long-term orientation create value? Evidence from a regression discontinuity. Strategic Management Journal. doi:10.1002/smj.2629

1 comment:

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