Volume 21, Number 9
Tima Bansal’s research shows that balanced thinking in the boardroom helps the environment and the balance sheet.
The dangers of short-term thinking on long-term business performance receive plenty of attention from the media. Indeed, the 2008 financial crisis could be attributed to the pursuit of immediate returns (for shareholders and insiders). Academic research on this topic has also been short-sighted and relatively limited. Enter Ivey Business School Professor Tima Bansal, the Canada Research Chair in Business Sustainability and the J. Allyn Taylor/Arthur H. Mingay Chair in Business Administration. Bansal is making important strides in showing just how costly short-termism is to the long-term health of corporations and to the sustainability of our planet and society.
Bansal recently examined the impact of long-term executive incentive plans on firm outcomes by comparing the performance of companies that adopted shareholder resolutions calling for long-term executive incentive plans with the performance of companies that did not. This study —conducted with Ivey Assistant Professor Caroline Flammer—focused on compensation proposals that passed or failed by a small margin of votes (such as 50.1 per cent or 49.9 per cent) at shareholder meetings. These “close call” proposals are akin to a random assignment of long-term corporate incentives and therefore provided a quasi-experimental setting to measure the causal effect of long-term orientation on firm performance. The findings in this case were clear and important, thereby advancing research and offering important managerial implications. Companies that adopted long-term incentive plans showed higher stock-market performance immediately following the adoption of long-term executive incentive plans as well as higher profitability over the long term. And these firms also invested more in R&D and socially-responsible business practices.
Simply put, Bansal and Flammer were able to demonstrate that increased long-term orientation appears to enhance value for two main reasons. First, by adopting longer time horizons, companies are able to counteract the myopic tendencies of their managers, who might be overly concerned with short-term performance. Second, companies with longer time horizons can choose from a wider set of corporate strategies to maximize firm value, which include long-term strategies such as investing in innovation and stakeholder relations.
In addition to raising awareness of how thinking and acting long term helps firm performance, Bansal’s research has also demonstrated how firms benefit in other ways over the long term by adopting sustainable business practices. Working with Natalia Ortiz-de-Mandojana of the University of the Balearic Islands, Bansal co-wrote a paper that identified the long-term benefits of social and environmental practices. These initiatives improve a firm’s impact on the social and natural environments, and include practices such as community relations, diversity, employee relations, human rights, product quality and safety, and concern for the environment and responsible corporate governance.
Bansal and Ortiz’s study matched 121 corporations with strong sustainability practices with those with weaker practices (242 firms in total) from 1990-1993, based on similarities in size, performance, risk, and industry. They argued that these practices essentially inoculated the firm by providing organizational resilience. Normally, it is difficult to detect resilience since it is hard to measure the avoidance of a disaster. But, Bansal and Ortiz were able to overcome this limitation by extending their study over a very long period. Bansal and Ortiz were able to see over a 15-year period (1994–2008) that organizations with stronger sustainability practices had higher growth, a higher survival rate and lower financial risk. These findings help put the meaning of ‘sustainability’ back into the term – firms that have socially- and environmentally-responsible practices have sustained higher performance. Most of the existing academic work in this area aims to show the short-term financial benefits associated with sustainability practices, while Bansal and Ortiz demonstrated that benefits accrue over the long term thanks to greater resilience.
Bansal—whose research is featured in Ivey’s annual report —isn’t just passionate about expanding our understanding of the costs to businesses and society associated with corporate short-termism and the long-term benefits that come from adopting social and environmental practices. As Director of Ivey’s Centre for Building Sustainable Value as well as the Executive Director for the Network for Business Sustainability, she is dedicated to creating positive change by helping to shape business practice and strengthening the ties between research and practice in the area of sustainable development. Her efforts have been supported by more than $7 million in funding for sustainability-related research from the public and private sectors since 1999.
“Not all corporate short-term thinking is bad,” says Bansal. “But left unchecked, short-termism is the antithesis of sustainability, so we clearly need to encourage more balanced thinking in the boardroom. The good news is that our research shows that balancing short-termism with long-term thinking doesn’t just help society and the environment, it is actually also the right thing to do for the long-term health of business balance sheets.”