Grey Rhinos are Inevitable
The ongoing pandemic has exposed a lot of short-term thinking. Many businesses were caught unprepared for lockdowns and supply chain disruptions. While it was hard to foresee the coronavirus, crises are inevitable.
In many ways, today’s business culture encourages short term thinking. A typical CEO at a public company might only be at the helm for a few years. That’s a very limited time window to take on big, long-term initiatives.
Quarterly reporting also creates a powerful incentive to focus on the short term. Costs hit the bottom-line right away, while investments with long-term return horizons and risk mitigation measures may only pay off years from now, if ever.
Ideally, public companies have check-and-balances to help promote longer-term thinking. A board of directors is supposed to look after shareholders, and stock-based compensation is supposed to help ensure that executives think long-term. These mechanisms have pros/cons, and oftentimes do not appear to work as intended.
For example, board directors are often pleased with their prestigious positions, and don’t really wish to rock the boat. Or, they can be highly capable people who are over-committed and don’t have the bandwidth to really enforce strategic discipline.
Many business leaders put too high of a discount on future problems. In the last 20 years, we’ve seen the dot-com bust, the 9/11 attacks, a financial crisis, a pandemic, and countless smaller crises along the way. Anybody who expects smooth sailing in the next 20 years is fooling herself.
Expecting problems isn’t pessimism, it’s realism. Black swans or grey rhinos events will continue to occur every few years. Kicking the can down the road just because it enhances short term financial performance is typically not strong leadership.
At Alliance, we are always preparing for future risks and our compensation is closely tied to the long-term performance of our investments. Even through this past year, when the commercial real estate industry has suffered heavy losses, our portfolio has held up exceptionally well. One key to our success is that we recognize that the world keeps changing, and we need to be ready. Our track record shows that we are.
