The long and short of it: What makes CEOs decide?

The way a CEO communicates can help in predicting the company's performance

Last Updated: Nov 23, 2022, 11:01 IST4 min

A CEO is expected to deliver good short-term results w...

The CEO’s Dilemma

A CEO is expected to deliver good short-term results while securing the firm’s long-term sustainability. However, companies face contradictory demands in their efforts to do that. To be sure, managing operations for the long haul is challenging.

And as companies often achieve their goal of improving their performance after their CEO has left the job, the outcomes cannot be directly credited to the person. That gives the initial impression that the previous CEO did not perform as well as the incumbent.

This phenomenon is well-known to business leaders, and addressing it ethically requires a deeper understanding of top management’s thinking. As such, the considerably less concrete research on how CEOs think calls for a dedicated study of their personality traits and their impact on corporate performance.

Playing to Win versus Playing Not to Lose

Imagine that two of your friends, Joel and Emma, have enrolled in the same prestigious training programme as you. You ask them about their motivation. Joel says he wants to upskill himself to improve his quality of life. One day he decided that he wanted to climb the corporate ladder. So he left his job to return to school. For her part, Emma says she wants to support her family and secure her future financially. She applied to enrol in the training course after her university studies, as the retrenchments during the pandemic made her wonder about her employability.

Let’s look at their motivations, decision-making, and goals. Even though their goals are the same – certification with distinction – their motivations and the decisions they take during their course will not be. What primarily motivated Joel was his desire to maximize gains. He was more open to taking risks and is likely to take them in his training and professional journey. Whereas Emma was more concerned about minimizing losses, as opposed to making gains. And she will probably avoid experimenting with her newly acquired skills and stick to the traditional path.

They both got on to the training programme, so both their mindsets have some merits. But is there a definitive way to know which method is better in a specific situation when two people have opposite motivations and follow different paths?

Losing sight of the long term

We attempt to answer that by using what we call Regulatory Focus Theory. This describes how a person pursues their goals depending on their values and beliefs, and centers around two motivations – promotion and prevention. For instance, a person focused on promotion will be motivated to pursue opportunities for gains. Conversely, a person focused on prevention will be motivated to avoid making errors that result in losses. For Joel, he would be happy after attaining his certification if he improves himself, while Emma would be happy if she doesn’t become unemployed.

The very nature of the marketing field also has an impact. Some industries – formerly viewed as growth sectors – are now on the verge of decline. One of the reasons for this is the pattern of compromising on the creation of value for the long term by focusing on activities that yield fast gratification. Between 1996 and 2018, this focus on short-term gains led to a loss of US$79bn in annual earnings at S&P 500 firms.

The problem is that this short-sighted decision-making influences corporate marketing departments and prompts them to manage their marketing only for the present instead of preparing for the future. We call this myopic marketing management, and companies do that to manage stock-market pressure and avoid reporting earnings shortfall.

Finding the balance

So how are these two factors interrelated, and would it help us to resolve the CEO’s dilemma of making decisions that balance long-term and short-term plans?

We find that the tendency of engaging in myopic marketing management increases when CEOs are faced with the pressure of meeting short-term earnings expectations. As such, promotion-focused CEOs aim to benefit from the increase in stock price (even though it is temporary), while prevention-focused CEOs, being more risk averse, are less likely to fall into this quick gains trap.

Beyond these topics, we also consider the CEO’s compensation structure and the business environment in which they operate. We found that equity-based compensation reduces promotion-focused CEOs’ likelihood of making myopic marketing decisions, as it helps to promote a focus on long-term value. Prevention-focused CEOs’ tendencies toward myopic marketing management, however, are indifferent to such a compensation structure.

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