It is fitting and proper that different organizations have different time frames. We shouldn’t get upset about some managing to quarterly results. Instead, we should make sure we’re using the right type of organization for the right things.
The basic thesis is that:
• Public companies manage to quarterly earnings reports.
• Private Equity backed companies manage to an event a few years down the road.
• Private companies manage to create value over the life of the owner and his or her family.
• Governments should manage for the good of generations to come.
The logic is all about risk and reward.
Since the laws require public companies to report earnings quarterly, we shouldn’t be surprised that they focus on those quarterly earnings. Managers in public companies know that their jobs are on the line each quarter. So they manage the business to produce a steady stream of news that is as good as possible.
As Keynes said, “In the long run we are all dead”. Practically minded managers in public companies will always choose to deliver the next quarter over investing for the long-term. That’s how they survive quarter by quarter.
Private Equity Backed Companies
Non-public, Private Equity backed companies do not have to report quarterly earnings. Instead, they have to provide a return to their private equity investors at the end of the run of the fund. They do this by buying, improving and merging companies and then selling them to generate returns.
With their eyes on exits they have a longer time frame than do public companies. The better run private equity firms know that whomever buys their companies from them will do so in order to increase the value of their acquisitions even further. These firms know that investing in management and infrastructure for the long-term will boost their own exit price so they look well beyond their own exits to building future value-creation opportunities.
Private Family Owned Companies
The time frame is even longer for private family owned companies. These owners aren’t looking at quarterly earnings, aren’t looking at exits, but look at creating wealth for their families over their own life-times and even over the life-times of generations to come.
As a result, these organizations are well positioned to make investments now that will produce returns much later. Thus these firms are especially well positioned to incubate long-run innovations.
The United States government was constituted to “establish Justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.” That’s the longest time frame of any of the organizations discussed here.
The government can and should have its eyes on “posterity”. The government can and should be investing in the long-term infrastructure that enables public companies, private equity backed companies and private family owned companies to prosper.
The overall implication is to point different organizations in different ways.
Don’t expect public companies to fund education and other infrastructure for the common good. That’s the government’s role.
Don’t expect private family companies to care about quarterly earnings. Those are distractions.
The regulations are in place. What’s not right is our mindset, the way we talk about things and where we’re pushing innovation. We should give up trying to change organizations’ natures and invest our time and energy in helping organizations do what they need to do to benefit society overall.
The main issue is innovation. We should not expect major public corporations to produce revolutionary innovations. They’re good at evolutionary innovation that yields incremental improvements, not game-altering step-changes. Instead, we should feed our investments in innovation to private companies that can take a longer-term view. Forget government-public partnerships. Move towards government-private partnerships. Their time frames are more closely aligned.
So public companies should focus on incremental evolutionary innovation to deliver quarterly results. Private organizations should focus on things that will produce returns during the appropriate time frames. The government should have its eye on posterity.