A recent study by McKinsey found that the average lifespan of companies listed in the S&P 500 was 61 years back in 1958, and only 18 years today. According to the study, longevity of companies will continue to decline, with 75% of current companies disappearing altogether from the S&P 500 by 2027.
The trend shows that average tenure on the list continues on a downward slope.
There are several reasons why companies drop off the list. Companies file for bankruptcy and go out of business, some are acquired, others go private. However, the most significant factor why this happens is companies losing market share to competition. A company cannot endure in the long term without reinventing itself.
Companies disappear because they don’t stay relevant.
Significant technology advancements and societal shifts occurred in the last few years which are now fully engrained in our daily lives and, along the way, have directly impacted business models and corporations. The transition from 3G to 4G networks allowed us to download a movie in 40 seconds vs 5 hours, disrupting the media industry and giving rise to streaming and Netflix. The rise of social media allowed for instantaneous broadcast of our life experiences. The resulting data capture aids the search and other algorithm-centric industries in targeting individuals with online advertisements. The emergence of artificial intelligence and proliferation of data gave rise to the optimization of payments and e-commerce. The migration to the cloud allowed us to create new business models based on subscription revenues, realtime updates, and software-as-a-service capabilities that are made available to the consumer much faster than with traditional data centers.
On the S&P 500, we’ve seen Macy’s, Borders and Tiffany & Co. drop from the list to be replaced by digital commerce companies such as Amazon. Oil and gas exploration companies dropped off the list to be replaced by new energy companies such as Tesla. The health landscape on the list has been re-shaped by a shift to companies driving digital health.
New trends will once again facilitate the re-invention of industries and new business models. These trends will make it possible for companies to optimize productivity and re-invent offerings. Companies that anticipate how to optimize these trends will remain successful in the long run. The introduction of 5G and 6G networks will bring computations and artificial intelligence from the cloud to the edge, and will enhance user experience in industries such as healthcare, manufacturing and entertainment by bringing better digital experiences with increased personalization. Breakthroughs in biology and digital technology will improve agriculture, healthcare and consumer products. Autonomous and connected technologies will disrupt transportation. Web3 will empower creators with new business models to monetize and own their creations. Tokenization platforms will let us bring commodities and other assets from the physical space to the digital realm. Immersive reality will let us see the world and connect with each other in new ways. And with 20% of the workforce working from home today, remote work will be a permanent societal shift. This will free up opportunities for companies to hire better knowledge workers from anywhere.
This progression is a very real threat for shareholders of existing companies.
Since the primary role of any board is to ensure that the company’s strategy remains relevant by understanding what risks the company faces, these new macro trends should be a focus for all board members. Board members look out for the shareholder’s interests and have a responsibility to identify and monitor risk. This requires that board members understand the risks associated with corporate strategy and that they are prepared to act on issues as they arise.
Most of the time boards only get to see what they are presented with by company executives, and at times become passive recipients of the company’s agenda. Boards at public companies also face significant demanding workload, and agendas tend to be focused on the year ahead, rather than years ahead.
With this in mind, here is a question that every board member should be asking:
“How are these macro trends affecting our business and who will our customers be in the near future?”
Something else to keep in mind is that a majority of public companies vest risk oversight to the audit committee of the board, very rarely standing a separate committee for macro trends or business model disruption. Since most audit functions are forensic and backward-looking, as opposed to forward-looking, having a discussion of future business models and macro trends in the audit committee may not be ideal.
At times there is a dependency on the CIO (Chief Information Officer) to update the board once or twice a year with the state of Digital Enablement and Technology, but the CIO role tends to be consumed with business as usual initiatives, cloud enablement, managing end of life roadmaps, outsourcing services, improving technology operations and reducing the cost of the technology budget that is still mainly consumed by very crucial legacy products. Macro trends discussions would be competing for airspace with day to day operations.
So how is the board leading the strategic discussion of business models that are about to be disrupted, supporting new company structures, and supporting new investments in this space?
If you are on a board, and all this sounds too familiar, you rightfully may be concerned. Make sure these discussions are happening now. Get the conversation added to the board agenda. The following 6 questions may be helpful in framing the conversation:
1) Are we spending enough time and effort assessing the organization’s long term strategy?
2) Do we fully comprehend how our company creates value, the dynamics of our industry, and how this opportunity to create value may be evolving in the near future?
3) What macro trends are changing our business model in ways that are not reflected in our discussions?
4) How are we incorporating these trends into our company strategy?
5) Looking at the competencies around the table, are we refreshing the board with directors who can adapt to this velocity of change?
6) Do our directors have experience navigating a company through transformative change in a number of industries and business models?
By changing your engagement from reactive to transformative, leveraging lessons from the past, you can help reverse and have a significant impact on the longevity curve. You can help define the future strategy and direction of your company and be part of transformational progress. After all, the best way to predict the future is to create it.
Dr. Julieta Ross 