Page 39 - Chapter One

Why it is Time Now for The Management Shift 7

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increasing debt, 35,36 declining retail outlets, and growing dissatisfaction
with services. 38

Leading international accounting firm Deloitte’s Center for the Edge has
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developed a Shift Index designed to provide insights into long- term per-
formance trends. The Shift Index in 2009 highlighted long- term performance

challenges of companies. For example, the ROA for US firms has steadily
fallen to almost one- quarter of 1965 levels despite improvements in labor

productivity; the “topple rate” at which big companies lose their leadership
positions has more than doubled, suggesting that “winners” have increas-
ingly precarious positions; the US competitive intensity has more than dou-
bled during the last 40 years, increasing rivalry and the pressures companies
are facing; increasing customer disloyalty indicates that customers also seem
to be gaining and using power, enforcing the need for companies to focus on
customers rather than share price. Furthermore, the 2010 Shift Index reveals
that, unsurprisingly, passion for work remains low and in some industries
has declined, with less than a quarter of the workforce feeling passionate
about their current work; capital movement slowed dramatically; and execu-
tive turnover reached a five- year low. One of the conclusions from this study

is that all long- term trends point to a continued erosion of performance.
Another problem relates to too much focus on short- term share price

at the expense of long- term sustainable performance. For example,
80 percent of respondents in a survey of more than 400 executives
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indicated they would decrease spending on R&D and other similar
expenditure to meet short- term earnings targets. According to a Harvard

Business School study, over a period of 18 years companies with
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long- term and sustainability focus outperformed matched companies
in terms of shareholder returns by 4.8 percent annually. Similarly, Justin
Fox and Jay Lorsch show in their Harvard Business Review article “What
Good are Shareholders?” that the companies that are most successful
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at maximizing shareholder value over time are those that pursue other
goals instead of aiming to maximize shareholder value. The problems with

shareholder maximization are well summarized by well- known author
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Dan Pink, “CEOs and others often spend more time smoothing earnings
to benefit themselves personally in the short term than they do building
companies and benefiting shareholders in the long term”.