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Innovation Blog

CEO: Are You On the Sisyphus Treadmill? Can You Get Off?

By Shlomo Maital

In Greek mythology, Sisyphus was a King who transgressed and was punished. His punishment was to push a heavy rock up a steep hill,  and then, just as he reached the summit,  the rock tumbled down to the bottom again — and Sisyphus began all over, and continued doing this, until the end of time.

The modern Sisyphus is the CEO.   Twelve years ago, in a typically insightful article, McKinsey Global Research revealed what I think is a fundamental flaw of capitalism and capital markets.   I think this flaw ultimately helped contribute to the 2007-9 crisis.  Here is what McKinsey described, in “The expectations treadmill.” (August 1998)

“… executives labor on a kind of treadmill, whose speed represents the expectations of future financial performance implicit in a company’s share price. Beat them and you not only raise shareholder returns in the short run but also accelerate the treadmill. The better you do, the more the market expects from you; you must pound the treadmill ever faster just to keep up. To learn more about why extraordinary executives often fail to deliver extraordinary share price increases, particularly in the short run…”

Put simply:   Suppose you are a highly innovative CEO.  You drive top-line and bottom-line growth up substantially.  Shareholders are surprised, pleasantly.  Your stock price rises, because shareholders factor this growth expectations surprise into expected future earnings, which drives today’s share price.    So now, you are expected to continue the sterling outstanding performance you created, through innovation.   Indeed, you are expected to accelerate it even further…a classic Sisyphus rock.   At some point, even the greatest CEO’s will be unable to maintain accelerated growth.   Stock prices then dive, the CEO is sent packing…and a new victim is found.   But with vastly exaggerated compensation for short-term success,  the CEO departs happy, with a huge golden handshake.  He or she has done the job, rewarded himself nicely, even though this behavior  endangers the long-run prospects of the company, its workers and even its shareholders.  Unlike Sisyphus, the CEO can bail out of the system, leaving someone else to clean up the mess.  An irrational system.

What is the solution?  Changing capital market behavior, values and expectations, to focus on long-run growth, not short-term ‘surprises’, and to reward CEO’s able to build companies “built to last”, creating shareholder AND mostly customer value for the long haul.

What are the odds impatient shareholders will stop focusing on the quarterly P&L?  Pretty small.

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Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2010
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