Time Horizons and Technology Investments (1992) / Chapter Skim
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3 Company Time Horizons and Technology Investments: The Roles of Corporate Governance and Management
3 Company Time Horizons and Technology Investments: The Roles of Corporate Governance and Management
Pages 26-42
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From page 26... ...
This pursuit of niche markets demands faster product changes and more flexible marketing departments, design departments, and manufacturing processes. The implication is that organizations must develop and improve their products and 26
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From page 27... ...
A corporation that avoids or manages such events well will exhibit noticeably more constancy of purpose and, probably, longer time horizons than one that does not. The purpose here is not to argue that external influences do not affect corporate time horizons but rather to recognize that management practices can either reinforce or run counter to external influences on time horizons.
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From page 28... ...
Among the factors important to the time horizons of a company's investments and largely under the control of company governance or management are the following: Investment decision-making and planning methods Incentives and reward plans for management Operational and project management techniques Career paths and patterns for employees Corporate financial structure and practices This section describes major management and governance practices that influence the time horizon a company exhibits. The role of management and corporate governance in capitalization (debt/equity structure, decisions about how and when to raise capital, methods of obtaining investment cap~tal without going to the financial markets)
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From page 29... ...
An increasingly important segment of shareholders for large public companies includes institutions (such as pension funds, mutual funds, insurance companies, and trusts) that have professional investment managers who themselves represent others, who often know little about the business the company is in, and who are far more likely to trade out of a company that is performing poorly than to try to improve performance through corporate governance mechanisms.
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From page 30... ...
importantly influences the time horizon of a company through the selection and development of senior management. Boards of directors have as a principal responsibility the choice and continued appraisal of the chief executive officers and the development and balancing of senior company management.
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From page 31... ...
Corporations could move to increase the financial stake that their outside directors have in the corporation by requiring that they own shares at least equal in value to a specified multiple of their annual fees as directors. The intent is to link board member compensation as directly as possible to long-term performance in stock price.
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From page 32... ...
One approach for avoiding this situation is for companies to establish a nominating committee of the board consisting entirely of outside directors with sufficient staff support to permit a thorough and competent job to be done. THE PREROGATIVES OF MANAGEMENT AND CORPORATE TIME HORIZONS The direction and operation of a corporation is a complex and diverse task often requiring a wide array of managers; companies have top management, sector management, group management, division management, management staffs, functional management, and program management.
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From page 33... ...
A conscious portfolio strategy to defend long-term, uncertain investments in support of specific strategic thrusts can be a rational part of maximizing long-term corporate returns. Managements are virtually always forced to balance two competing pressures in the execution of a strategy.
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From page 34... ...
who can offer advice and information with respect to technology development and deployment. The consequences of poor management of a longer-term technology-based strategy appear in a host of discernible events promising projects that are late to market because they are deprived of resources at a crucial time, an increase in the reliance on older products to produce revenues for the company, a difficulty in attracting and keeping good talent because "the action" is elsewhere, a steady decline in investments in longer-term product or production technology development or longer-lived assets, or, the ultimate indicators, steady declines in market share and the exit of patient shareholders.
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From page 35... ...
On the other hand, significant problems can be created if a company's promotion and career development system leaves managers in certain program or functional positions for too long. Senior management must balance the desire to reward employee performance and to develop talent internally by providing individuals with a variety of experiences against the advantages of longer-term tenure and experience in positions; it is critical to design incentive systems and career paths carefully so that short-term and appropriately long-term performance is rewarded.
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From page 36... ...
profitability. Obviously, there is no single correct time horizon of reward systems-incentives need to be tied to each employee's specific assignments and, where appropriate, to important time horizons of the division, the industry, and the particular strategy of the company.
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From page 37... ...
These tools, improperly applied, may lead the decision maker to discount future income streams too much; capital budgeting manuals provide ways to ignore cash streams beyond some time, typically three to five years in the future. Common failures in the application of financial decision tools are ( 1 )
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From page 38... ...
Comparison of the P/E value of an internal project no matter how difficult or tenuous the estimationagainst the baseline case of not performing the project could change the seeming attractiveness of many longer-term technological projects. Effective use of financial analysis tools can help establish more appropriate time horizons for projects by estimating the future value of technology investments.
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From page 39... ...
While profit margins are useful information in some situations, selection of profit margin as an overriding measure of company performance can promote damaging game playing. In most operations it is possible to maintain- or increase the profit margin by minimizing expenditures for advertising, market development, R&D, or customer-site product testing (or by "creative" inventory valuations, by holding inadequate reserves and by creating windfalls from financial asset manipulation or the sale of assets)
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From page 40... ...
be attentive to the importance of balance within the senior management team and (2) link compensation packages for senior executives to their performance in developing and implementing plans for the long-term prosperity of the company.
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From page 41... ...
41 Second, since the actions of boards of directors are crucial to the time horizons of a company, so are the methods by which directors are selected, compensated, and removed. Corporate governance might be improved by increasing the financial stake that their outside directors have in the corporation by requiring that they own shares at least equal in value to a specified multiple of their annual fees as directors.
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From page 42... ...
42 TIME HORIZONS AND TECHNOLOGY INVESTMENTS new or continuing investments in technology development and deployment. Faulty or unrecognized implicit assumptions, lack of attention to strategic considerations, and poor handling of technological or market uncertainty in the use these tools can critically damage a company's decision making about technology investments.
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