I was quite struck by a line within an article written by Nitin Nohria, the dean of Harvard Business School (HBS), who made a very simple yet powerful suggestion to counter short-termism: think right to left.
Nohria credits the original idea to Jim Champy, author of “Reengineering the Corporation: A Manifesto for Business Revolution”. What most business leaders (and arguably most investors) do is think left to right ie start by focusing on immediate issues and then think about how to get from here to the goal (left to right).
Champy recommends instead that leaders think more carefully about their long-term goals and then think backward about what they need to begin doing today to achieve these goals (right to left).
Nohria applied this thinking to his role of managing the MBA programme at HBS. Thinking left to right, he argued, would lead to him discounting the threat of online education while thinking from the right about the business education landscape in ten years’ time, he could no longer ignore its promise and peril.
I believe this way of thinking has immense implications for those investors who want to build a long-horizon mindset.
Right to left thinking, by design, focuses on the long term because it starts from the distant future and works backwards to the present. It encourages investors to project themselves far into the future, think strategically about long-term end goals, long-term liabilities and / or obligations and resources and comparative advantages they can exploit to achieve these long-term goals.
Right to left thinking improves alignment. When investors start their thinking process from the right, the purpose receives the attention it deserves. For example, engaged in this way of thinking, a defined contribution pension delivery organisation would place more emphasis on achieving sufficient incomes for plan participants post retirement instead of participating in rather harmful short-term “mark to peers” activities. Left to right thinking starts with and focuses on the “what”; in contrast, right to left thinking focuses on the “why”. It is the “why” that inspires people and encourages the right behaviour that aligns with long-term goals.
Right to left thinking also enforces discipline for investors to focus on the information that encourages long-horizon thinking. Instead of assuming that the current themes continue to play out and trying to front run markets in identifying winners and losers, right to left thinking encourages the identification of long-term transformational changes that have far reaching implications in the distant future and higher impact on the investment portfolio in the long run. Instead of obsessing about catalysts for near-term price adjustments (flow of immediate results, how earnings might compare with market expectations), investors who think from the right naturally pay more attention to factors like long-term cash flow generation potential, sustainability of competitive advantage and, for universal owners, sustainability of the financial system / wider society / environment and licence to operate issues.
Last but not least, right to left thinking promotes a long-term approach to risk management. Starting with immediate issues and short-term outlook, investors understandably (but mistakenly) view risk as price volatility. A long-term risk management approach starting from the right recognises failure to achieve mission as the ultimate risk and therefore targets avoiding a permanent impairment in the mission. With a long time horizon, the likelihood of certain extreme risk events become significant enough to receive attention while a short-term left to right approach would dismiss its chance of occurring and ignore its potentially catastrophic impact. A great example of applying right to left thinking in risk management space is so-called pre-mortem analysis. It is designed to ask the question “in 20 years’ time, our organisation fails / no longer exists, what happened?” This technique facilities a deep discussion on potential threats and increases the likelihood that main threats are identified and as a result are prevented or avoided or, at least, managed in some way.
Building a long-horizon mindset starts from thinking right to left.
By the way, the whole article is very good – download the full publication from this website and head to page 36.