There is a famous experiment in the world of child psychology and emotional intelligence. The marshmallow experiment puts four-year-olds in a room with a marshmallow and no supervision. The child will be told that (s)he receives a second marshmallow, if (s)he can manage not to eat it for a few minutes. There are some really funny videos on line which show the kids craving to eat it: https://www.youtube.com/watch?v=Yo4WF3cSd9Q. Some kids manage to abstain and happily receive a second marshmallow. Others give in to the temptation and enjoy their one marshmallow. The way different kids cope with the temptation is hilarious. But the craving for instant gratification is not the exclusive domain of kids. Temptations runs all the way to the executive level.
Last week Larry Fink, the CEO and Chairman of Blackrock, the largest investment bank in the world, wrote a letter to the CEO’s of the publicly listed companies, Blackrock invests in. The letter was about the executive marshmallow. He pointed to the fact that publicly listed companies keep increasing their dividends and are buying back shares more than before. In the short run this is great news for investors who get immediate dividends paid or see their share price increased. Dividend payments and share buy back plans can be managed relatively easily through like cost cutting, postponing investments and cutting jobs.
Fink also points out that the role of top management is to come up with a strategic plan for long term value creation. However cost cutting and postponing investments give more certainty than strategic investments for the future, which are always at risk of changing market conditions, technological innovations and competitive moves. Just like that marshmallow in front of the kids. Eating it is guaranteed instant gratification. Postponing it with a strategic vision may lead to better results, but riskier. In the boardroom the basic anxieties around: “have we got our vision right” are often ignored. Is there enough real challenge and debate around the direction in the top team, or do they get hijacked by their own fear and focus on the more manageable levers they can pull? One more Black Rock data point: in almost 40% of the challenges by activist shareholders, Blackrock voted for the activist shareholders. In other words: they had more trust in the strategic framework of (part time) investors, then the top team full time leading the company. Food for thought for development at the top level. If you have seen the kids movie mentioned above, just imagine your CEO sitting in his office with an investment plan in front of him. What would that video look like?