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The Patient CEO

“Patient money” is the term used to describe an investment that yields little or no return for a long period …

“Patient money” is the term used to describe an investment that yields little or no return for a long period of time, but holds the potential for a significant payout down the road. It often describes purchasing land, buying a tree farm, or investing in small-cap growth stocks. Modern-day venture capitalists epitomize patient money: A typical venture-capital fund is set up to be liquidated in 10 years; few, if any, returns are expected for at least five years.

In the corporate world, patient money is poured into basic research; into large-scale product and market development programs; and into acquisitions of smaller, technologically advanced companies. The U.S. pharmaceutical industry has attained world leadership through sound application of this patient-money principle.

However, these days, it seems the pressure is on CEOs to he impatient. Cut costs to the bone to show a quicker, higher return on investment. Speed up all processes that lag behind the curve. Spin off, scrap, or sell units that don’t contribute to this year’s or next year’s profits. Never have a down quarter, because you will be punished for it.

The forces that press for impatience are out in full strength: the so-called relational investor with a large chunk of stock in your company who may have quite a different timetable than the one you set in your strategic plan; the financial analyst who volunteers forecasts for your next quarter that are higher than yours; the very “pay-for-performance” incentive plans you established to appease the compensation critics. All CEOs feel the inexorable pressure to achieve results quickly.

As CEOs, we tend to be impatient with our people. We want them to accept instantly an organizational restructuring, a total-quality-management program, a new computer networking system, an optional benefits schedule, a changed executive compensation plan. Forgetting that some-or mostof our people need time to comprehend and absorb a major corporate move before they can wholeheartedly embrace it, we push too hard, too soon for results. This is a lousy way to run a railroad. We hurry so much to do things in a cheaper, faster, and more mechanical way that we sometimes forget our basic objective is to build the business-and. the fault often lies with CEOs and their boards as much as with outside pressures.

Why can’t we do both-continuously plant the seeds for tomorrow and harvest as we go? This dual task can be accomplished, but it is difficult. It demands an exceptionally competent and gutsy CEO; a supportive board; and a sensible, well-articulated plan. It has to be sold to the shareholders, the analysts, the employees, and sometimes to the public.

Take General Electric, which is investing heavily in China, India, and Mexico-huge, long-term markets that require nurturing but have enormous payout potential. GE launched this global push at the same time it implemented cost-cutting processes in other areas and divisions.

A.T.&T.’s acquisition of McCaw Cellular is in much the same vein. The maneuvering in the telecommunications industry involves great sums of patient-capital investment from those companies that hope to be major players. Louis Gerstner of IBM, George Fisher of Eastman Kodak, Michael Jordan of Westinghouse Electric, and other turnaround chief executives continually wrestle with this problem of patience and impatience.

All companies do not have the capital clout of the big businesses mentioned above. But nearly all companies have room to do most of the things that patiently build the business-conduct critical research, foster product development, instigate new-market expansion, hire new people, buy new -equipment, adopt new procedures. And almost all companies have a resource backlog of technology, know-how, know-who, and know-where that can be exploited with a modicum of patient capital by a moderately patient CEO. Patience is not necessarily a risk-aversive venture. Far from it. “Patient” capital also is known as “risk” capital. The patient CEO must assess his risk/reward ratio carefully. Investing capital and time in a venture is foolish, unless the rewards are disproportionately great.

It’s all right to be an impatient CEO much of the time. When people don’t do it right the first time, when suppliers let you down, when managers don’t give you the full story, when supervisors resist positive change impatience can be a virtue. Every good CEO has an impatience threshold, and all of his people know it.

But when it comes to implementing your vision of your corporation’s direction and time schedule, you might try being a patient CEO occasionally.

Formerly the CEO of F.&M. Schaefer (1972-1977), Robert W. Lear is chairman of CE’s advisory board. He also teaches at Columbia Business School, where he is Executive-in-Residence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Scudder Institutional Funds; Korea Fund; and Welsh, Carson, Anderson, Stow Venture Capital Co.

About robert w. lear