• Strategy
  • McKinsey & Co.

Building the Healthy Corporation

It is difficult, but vital, for managers to strike a balance between the short and long terms.

Such shortsighted behavior is widespread. In one recent survey, (John R. Graham, Campbell R. Harvey, and Shivaram Rajgopal, “The Economic Implications of Corporate Financial Reporting,” NBER working paper number 10550, January 11, 2005), a majority of the managers polled said that they would forgo an investment offering a decent return on capital if it meant missing their quarterly earnings expectations. Indeed, more than 80 percent of the executives responding said they would cut expenditures on R&D and marketing to ensure that they met their quarterly earnings targets — even if they believed that the cuts were destroying long-term value.

This survey shows that even if more organizations are now talking the language of health, many address the issues only at a superficial level. For instance, “scorecards” — a favorite approach of many companies to balancing near- and long-term considerations — too often consist of disconnected metrics that confuse the organization and lack any real impact. One public-sector agency we know — an extreme case, to be sure — came up with 96 key performance indicators at the end of a two-year initiative; the list was effectively dead on arrival when it was rolled out for implementation. The chief executive of an international bank was recently shocked to find that members of his senior-management team were responding only to revenue targets and deliberately ignoring broader metrics of performance and health.

What underlies the breakdown of many long-term initiatives is the tendency of managers to defend the performance of their own silos instead of debating and helping to shape action across the whole organization. In silo-structured companies, managers typically argue about the virtues of one metric as opposed to another (especially if transfer prices are involved), deflect debate to other parts of the organization, and set up barriers to change. This kind of behavior isn’t deliberately malevolent; it is driven by deeply held beliefs about a manager’s roles and boundaries and reinforced by the idea that the body corporate is the sum of many discrete units, each with independent characteristics, that should be monitored with a battery of metrics. Unfortunately, this mind-set undermines any systemic understanding of how to manage activities coherently, across the whole organization, to underpin healthy growth.

An Emerging Awareness of Health

The good news is that a clear health consciousness is developing after the startling corporate-health failures of recent years, and convincing prescriptions for change are emerging. In responses to a McKinsey survey, conducted in early 2005, of more than 1,000 board directors, most of them made it clear that they want to devote less time to discussing the latest financial results and much more to setting strategy, assessing risks, developing new leaders, and monitoring other issues that underpin a company’s long-term health. Fully 70 percent of the directors want additional information about markets: a more detailed analysis of customers, competitors, and suppliers, for example. Upward of half want additional information about organizational issues, such as skills and capabilities. Two in five are eager for the facts about relations with outside stakeholders, such as regulators, the media, and the wider community. (Robert F. Felton and Pamela Keenan Fritz, “The View from the Boardroom,” The McKinsey Quarterly, 2005 special edition: Value and Performance, pp. 48–61.)

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