We’re not big fans of the big consulting houses, but the latest McKinsey Quarterly has an intriguing article titled Anatomy of a Healthy Organization that compares long-term organizational success with long-term human physical health.
Companies can take steps today to ensure that they perform well not only this year but also in the years to come. Underlying these actions is a mental discipline founded on the simple metaphor of human health, which improves when cared for and deteriorates when neglected. Further research has deepened the understanding of what a healthy corporation looks like and, more important, what business leaders can do to embed healthy attitudes throughout their organizations.
In both cases the operative phrase is "long-term"… and we’ve often discussed in the past the problems of short-term financial mindsets, often driven by Wall Street.
Yet many senior executives, try as they might, still find it hard to shift their attention away from today’s stock price and the next set of interim results. The forbidding presence of hedge fund and private-equity investors on corporate share registers and the increasingly short tenure of CEOs have only intensified the obsession with short-term performance.
The authors identify three reasons, traps as they call them, to drag leaders away from a long-term focus.
The first might be called the “mindfulness” trap: the tendency to be pulled back into a short-term performance perspective by the press of daily business, much as moments of reflection at home come abruptly to a halt when the doorbell rings.
Then there are the cognitive traps: a preoccupation with the near-term outputs of performance and what is needed to produce them, the mistaken belief that organizational health is soft and intuitive and therefore lacking the hard-nosed rigor and precision needed to drive performance, and the easy but wrongheaded assumption that near-term performance and long-term health embody a set of trade-offs.
Finally, there is the self-knowledge trap: our tendency to say one thing and do another. One management scholar, Henry Mintzberg, famously demonstrated in the 1970s that managers often see themselves as strategic visionaries, though in practice they spend a remarkably small proportion of their time on anything related to strategy.
The authors then postulate five attributes of "healthy organizations."
Resilience: Healthy companies are practiced at spotting and managing key risks (including low-probability but high-impact catastrophes), and they build mechanisms and have the resources to get through difficult periods. Wal-Mart Stores’ ability to reopen most of the 125 stores in the path of Hurricane Katrina within a few days owed much to an alternative railroad supply system, which temporarily replaced paralyzed highways, that the company had set up for just such an eventuality.
Execution: Companies that execute well share certain attributes: distinctive capabilities, the ability to make sound and timely decisions, strong forecasting skills, and employees who understand their roles and responsibilities. Too many managers take these things for granted. A healthy company pays attention to them constantly.
Alignment: Healthy companies, however scattered and disaggregated physically and organizationally, generally work toward a common cause. They usually achieve this kind of alignment when they sketch a compelling vision of the future for everyone connected with them—employees in particular—by articulating a shared identity that rises above individuals, functions, and business units; by reflecting stakeholder concerns in corporate values; and by reinforcing the sense of common purpose with formal mechanisms, such as performance contracts.
Renewal: Healthy companies invest in their future by expanding into well-chosen markets where existing assets and competencies provide real leverage, usually with the help of a winning formula that has been honed from experience and facilitates smooth integration across the entire value chain and the efficient extraction of synergies.
Complementarity: The concept of complementarity, explored in detail by John Roberts in his book The Modern Firm, often figures in organizational practices, such as hiring policies, training programs, and consistent and mutually reinforcing behavioral incentives. Toyota Motor has long been singled out as a company whose aspirations for quality, management of suppliers, and capability-building and management systems all serve to reinforce the drive for steady improvement.
The article goes on to describe different methods to allocate resources, create metrics, and manage performance to ensure that the long-term health of the organization is kept front and center. They conclude with,
Whatever gratification executives may get from a juicy set of financial results, the shareholders will ultimately judge them on their ability to repeat these achievements year after year. Becoming well acquainted with the attributes of health—and the tensions among them—is the first step in confronting that challenge. Unless companies embed a health consciousness in their key management processes, the goal of sustained performance will likely remain elusive.
Of course that presumes that the shareholders actually remain shareholders for more than a few months, and therefore have a long-term focus themselves. Unfortunately not an often accurate presumption.