Corporate world needs to look to the future, not just the short-term

IN a corporate world seemingly obsessed with the short term, there are still champions of the long view.

IN a corporate world seemingly obsessed with the short-term, there are still champions of the long view.

“If you aren’t willing to own a stock for 10 years,” Warren Buffett said in his 1996 chairman’s letter to Berkshire Hathaway shareholders, “don’t even think about owning it for 10 minutes.”

More recently, Larry Fink, the world’s most powerful investment manager, wrote to every company in the S&P 500 to warn of the ­financial risks posed by chronic short-termism. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in future growth.”

Boards and institutional investors would do well to adopt a more Buffett or Fink-like approach to decision-making. Instead, they prefer, as Mr Fink put it, to “cut capital expenditure and even increase debt to boost dividends and increase share buybacks”. Keynes’s animal spirits seem dimmed. Globally, firms are sitting on a cash pile of about $US7 trillion ($8.5 trillion).

It is not hard to see why we have become so risk-averse, so unwilling to commit capital to long-term projects with long-term payback. Low inflation or no inflation for 20 or more years, and little or no pricing power as a result, has been compounded by slower global GDP growth, certainly compared with before the GFC.

If pre-crash confidence blurred into irrational exuberance, post-crash insecurity has produced an excess of caution. Six years on, corporates still bear the scars of the collapse of Lehman Brothers and the chaos that followed.

At the same time, activist investors and hedge fund managers are pushing boards ever harder to deliver short-term results. Activists are even trying to align themselves with leading socially focused institutions to boost their influence, while adding to their funds for deployment.

In this environment the ­finance, IT and procurement departments have gained the upper hand over those functions that generally drive a company’s top-line growth, such as marketing and product development. The result is a focus on cost-cutting over investment and incremental change over fundamental innovation, which is what has happened in Japan since the 1980s, according to Clay Christensen, a Harvard Business School professor.

The trend for companies to reach goals by minimising costs rather than by maximising revenues looks set to continue as confidence in the global recovery remains soft.

Although there is a great deal of uncertainty about Britain’s long-term prosperity, advertising forecasts for 2015 offer a ray of sunshine. Revenues from marketing services closely track GDP, making them a fairly reliable proxy for the performance of a mature economy.

GroupM, the parent company for WPP’s agencies that invest in media space for brands, predicts a healthy increase in spending on media across Britain this year.

With forecast growth in ad spend of 6.3 per cent in 2014 and 5.7 per cent in 2015, Britain leads the mature consumer markets. For WPP, Britain has been a star performer, showing like-for-like revenue growth of more than 10 per cent.

Some of the credit clearly must go to the government and George Osborne, its chief financial officer. Although government borrowing remains at dizzying heights and there is precious little confidence in the plan to check the deficit, Britain’s recovery has exceeded ­expectations. But global economic woes and geopolitical issues, in particular the weakness of Europe, have left us with a world increasingly dominated by the “G2” of the US and China.

WPP has been a bull on China for more than 25 years. It is our third-largest market behind the US and Britain. The West has been slow to wake up to China’s ­resurgence.

True, tech companies such as Alibaba, Xiaomi, Tencent and Baidu now feature in the Western press daily, but — with the possible exception of Alibaba after its blockbuster flotation — they have yet to establish themselves in the general public consciousness.

This is largely because, with such a vast home market, Chinese companies often judge they don’t need to look outside China for growth. But Chinese business appears to be developing a taste for international expansion. Xiaomi is the low-cost smartphone maker that has taken on and beaten Samsung and Apple in China.

The company is the third-largest smartphone manufacturer in the world. Its latest funding round valuation could exceed $US40bn and, if rumours are to be believed, it is planning a statement of intent by launching the Mi5 handset at the Consumer Electronics Show in Las Vegas this month.

With so many leaders of consumer firms converging at CES to see the latest gadgets, the event is also a chance to gauge business confidence.

I expect American chief executives to be a little more cheerful than most.

Buoyed by energy self-sufficiency through shale gas and by high-value manufacturing, driven by sophisticated capital-intensive techniques such as robotics and 3D printing, America’s prospects are good. Its own deficit-wrangling aside, the US has been enjoying positive economic news.

Less tangible, but just as important, the allure of Brand USA is as strong as ever.

That Xiaomi is even considering putting on a show in Las Vegas proves the continuing potency of the old notion that you haven’t made it until you make it in ­America.

Speaking to clients as they plan for the year ahead, the power of the world’s two largest economies is a constant theme. Where expansion is forecast, it seems likely to be focused in the US and China.

In a world of uncertainty, there’s a high probability that — for global business, at least — 2015 will be the year of the G2.

Sir Martin Sorrell is founder and chief executive of WPP.