The Case for Playing the Long Game: How Leaders Can Create Long-Term Value in a Business Environment with Short Term Priorities

Mike Petters, HII president and CEO addresses the Detroit Economic Club (as prepared)
The Case for Playing the Long Game: How Leaders Can Create Long-Term Value in a Business Environment with Short Term Priorities
HII Corporate

Thank you Stephen and good afternoon everyone. I am delighted to be here today. Now I don’t come to Detroit often – but you’d think I’d be more clever than to come in January, when today’s high is a balmy 27 degrees.

Our principal shipbuilding businesses are located south of here in Newport News, VA and Pascagoula, MS.

Collis P. Huntington, the founder of the shipyard in Newport News, said of his decision to locate the yard there, “There is never any ice in the winter, and it is never so cold but you can hammer metal out of doors.”

We sometimes get Detroit-like winter weather in Virginia, and on those occasions we describe the weather as “another great day to be building ships!” But even if HII’s winters in Virginia are a bit different from the Detroit winters, we do share several common interests with the great state of Michigan.

First, we’re building an aircraft carrier, the first ship of its class that proudly carries the name of a man who grew up in Grand Rapids. He was a former University of Michigan Wolverine center and linebacker, as well as the 38th president of the United States.

I’m speaking, of course, about Gerald R. Ford and we’ve come to know well his wonderful daughter Susan who serves as the ship’s sponsor. She is very involved in the ship’s construction and with its crew and the shipbuilders. She even participated in the flooding of the dry dock to launch the ship.

Additionally, we have strong ties with about 100 companies who call Michigan home. They supply us with various materials to build our ships. In fact HII has spent more than $300 million in the last several years with these suppliers – two thirds of whom are small businesses. Naval shipbuilding is truly an American manufacturing business.

At HII we build ships that are statements of national purpose – not only because of the missions they serve around the globe – but also because our suppliers are nearly 5,000 strong and come from all fifty states. And it is our privilege to bring all of that national effort together in our dry docks and at our piers.

But I’m not here today to talk with you about shipbuilding – or about the energy markets where we also do business – although these themes may come up in our discussion. I’d like to talk with you about the long game – specifically the need for business leaders to focus on creating long term value.

There is some serendipity at play here - because – and this wasn’t planned – today just happens to be the 129th anniversary of our Newport News Shipbuilding division. Our Ingalls Shipbuilding division in Pascagoula will celebrate its 77th anniversary this year – a very respectable tenure as well.

And I know that several member companies of the Detroit Economic Club have also seen your 100th anniversary come and go such as Borg Warner, Dow Chemical, Ford Motor Company, General Motors and DTE Energy Co. to name a few. So when I talk about the “long game,” you might say I am preaching to the choir. And you may be right.

Yet I would argue that today, more than ever before, there are mounting pressures on business to act in the short term, with less emphasis on the long term. It’s taking greater tenacity to play the long game. And I believe the stakes are higher.

I am confident that if HII or just about any company wants to not only survive but truly thrive for the next century or so, it will take a delicate balancing act between the short term pressures with the need for a long game view.

I only need to revisit Newport News Shipbuilding’s history for evidence - it was a long game play that set the stage for the future of Newport News and for what is today Huntington Ingalls Industries. In the 1950s shipyards were in a slump nationwide. A 1954 story in the New York Times reported on a survey of the six major yards on the Atlantic Coast and stated it “revealed a dark picture of idle shipways and sharply curtailed personnel.”

Only 30 ships were being built or ordered at the six yards which were each operating at about 25 percent capacity. At Newport News Shipbuilding, two years earlier, a decision was made that would forever change the nature of shipbuilding at Newport News.

Then shipyard president, Bill Blewett, sent a half dozen engineers to the desert in Idaho for study and training in a new, experimental technology then known as atomic power. From that initially small group, the shipyard then established an Atomic Power Design department to develop a large-ship prototype reactor with Westinghouse.

By the late 1950s, Newport News Shipbuilding was heavily involved in both nuclear design and construction – namely the first nuclear powered aircraft carrier – the USS Enterprise. Today, more than six decades later, Newport News Shipbuilding is the sole provider of nuclear powered aircraft carriers and one of only two yards that can build nuclear submarines for the U.S. Navy. By the way, USS Enterprise is currently being inactivated at a pier outside my office window after 52 years of service to America.

Blewett and his team – as well as our Navy customer – had strategic vision. They played the long game.

Moving beyond shipbuilding, let me share another glance backward in time to illustrate my point. In the 1960s at Stanford University, there began a series of experiments conducted to determine when the ability to delay gratification develops. These became known as the Marshmallow Tests. The first series of tests was with approximately 600 pre-school age children. The children were given a choice. They were each offered a marshmallow that they could eat right away or -- if they could wait 15 minutes until the researcher returned -- they could then have a second marshmallow along with the first. However eating the first marshmallow right away would mean automatic forfeiture of the second.

About 70 percent of the children ate the first marshmallow right away -- and this percentage held true through many years of testing. According to an article for the American Psychological Association, the psychologist who conducted the tests, Dr. Walter Mischel, said every child wanted the second marshmallow. Mischel referred to the difference between those who ate the first one immediately and those who waited for the second one as a “strategic allocation of attention.”

He added that we can’t control the world around us but we can control how we think about it. Let me repeat that – we can control how we think about the world around us.

Today, that world, OUR world as leaders of publicly traded companies, is fraught with a growing tension between the short term and the long term. Guess what? We’re not that different than four year olds. Most of our peers are in the 70 percent who do act in the short term – they’ve already eaten the first marshmallow.

The pressures for those in the 30 percent are real. Let’s consider some examples: Bill is intent on earning his second marshmallow. But in the middle of his test, the Institutional Marshmallow Services issues a report identifying Bill as a subject that is lagging his peers, and that his Total Marshmallow Return is in the 4th quartile. Bill should either eat his marshmallow, or step aside and let someone else eat it to keep pace with his peers.

Likewise, Barb is also focused on that second marshmallow. During her test, however, the laboratory’s landlord reminds Barb that she owes about one-third of her marshmallow to the landlord to cover lots of expenses – roads, schools, health care, etc. Barb is exceptionally good at math and realizes that if it takes one marshmallow to earn one marshmallow, then two-thirds of a marshmallow will only earn two-thirds of a Marshmallow.And if one third of that marshmallow is also due to the landlord (and it is) then she only ends up with a little more than one marshmallow for all her work. She might be forgiven if she wonders “what’s the point?”

When Chris takes the test, he is suddenly confronted with an enthusiastic, some would say active, researcher that questions Chris’ overall strategy to earn that second marshmallow. This active researcher believes that his strategy is better, and that Chris should give him the marshmallow. Chris is forced to hire a Marshmallow Proxy service in order to have a chance at that second marshmallow.

Jerri has studied all of these results and, despite her unsurpassed ability to strategically allocate her attention, she also realizes that if she eats her marshmallow first, she will get her picture on the cover of Marshmallow Magazine! Now I admit that this is a bit over the top.

But the point is that the short-term pressures are real in the world of publicly traded companies. Customers typically approach everything with a budget and expense mindset when ours is an investment and return one.

Great business leaders successfully make this important translation. Our shareholders justifiably expect us to create value. But “long term” in that group means three to five years, at the outside. If you can’t make the case for return on investment in that time frame (or less), then some will expect an “investment” strategy focused on share buybacks and increased dividends. But even the best calculations about ROI can be flawed.

For example, we have a crane in our machine shop at Newport News Shipbuilding. The crane was built in 1895. We purchased it used in 1920. Ninety five years later, it’s still going strong and is qualified to support both nuclear and non-nuclear construction. We have absolutely captured our return on investment.

Yet, in considering to buy this crane in 1920, if we were to have done the mathematical formulas to calculate our return on investment – no doubt they would have been very precise. And very wrong. No mathematical formula would have predicted this ROI.

Remember the aircraft carrier Gerald R. Ford? We plan to deliver the ship next year, we plan to refuel the ship in 2040, and we plan to inactivate the ship in 2065 – a bit longer than 3 to 5 years.

I read not long ago that half of the shares that trade on the exchange today will be traded by high-frequency traders. Now high-frequency traders do serve a purpose. They create liquidity and they do lots of things to allow the efficient allocation of capital which is the true miracle of capitalism. But at the same time, high-frequency traders are not terribly interested in what I have to say about strategy or where the company might be in 2016 or 2020, or that new program that will begin in 2022. They're interested in what the share price says about your company today.

Turning to the political environment, you see more of the same.

For the really big things in our society – education, transportation, energy, defense, research and development – annual budgets are just too short. Strategic priorities are always at risk of being short changed by faddish pet projects. Yet, to be fair, it’s hard to think long term when you operate in an environment with two, four or six year election cycles.

Certainly, the Budget Control Act was short term thinking – no one thought it would go into effect – yet here we are. Sequestration looms again, and we are at risk of turning the fiscal direction of the greatest country in earth’s history over to an algorithm. There is not a household on the planet that would do business this way.

If there is only enough money to do nine out of the ten things you want to do, then you would pick the nine. No one would try to do 90% of all ten. To put it another way - it’s hard to build just 90 percent of a ship. Or 90% of a highway. Or just 90% of our future generation’s education.

While it may be hard to watch, our regular order process for establishing national priorities has served us very well over for more than 200 years. Why don’t we start using it again? While most of my business is building ships, I do recognize that not every CEO can see out to 2065 for parts of their business. But we all face the same pressures – the constant drumbeat institutionalizing the short term.

No matter what your product or service is – no matter what your company does - there needs to be balance between the short term priorities of your marketplace and the long term strategy peculiar to your business - specifically a strategy open to investment in people, infrastructure, R&D, or you name it. We need to resist the temptation to only view things through the short term lens.

How do we do this? Well, the preschoolers in The Marshmallow Tests covered their eyes with their hands, turned around so they could not see the marshmallow, started kicking their desks or tugged on their pigtails. While on some days these strategies might feel more productive than what we’re actually doing, I’m not sure the answer is here.

However we can learn from them because by doing these things, the children were demonstrating a “strategic allocation of attention.” They couldn’t control their world but they instinctively knew they could control their actions. As can we.

So what do long game leaders share? I believe long game leaders have a personal touchstone.

For Ronald Reagan, it was his belief that every human being should be treated with dignity and this belief served as the foundation for nearly every decision he made. For example, his efforts at welfare reform, he said, were designed to “maximize human dignity and salvage the destitute.” His successful efforts in the collapse of the Berlin Wall were driven by his belief that, “It is the Soviet Union that runs against the tide of history by denying human freedom and human dignity to its citizens.”

The touchstone for Mother Teresa was caring for the poor. For Walt Disney it was all about creating the best family entertainment experience possible. Since he took control of Berkshire Hathaway in 1965, Warren Buffet has been relentlessly focused on building intrinsic value in his company.

For me, I believe that every person who walks through the gates at HII wants to do a good job. And that our leadership challenge is to create a work environment for everyone to do their best work. So I try and view every decision I make through the lens -- of what do we need to do to make this happen?

For example, we are establishing family health centers near our two shipyards where our employees and their dependents can go – six days a week twelve hours a day, and see a primary care doctor, get lab or x-rays as needed, talk to a nutritionist, health coach, etc. all for one flat fee of $15 per employee, per visit.

This is an investment in our workforce – in their ability to take more accountability for their health, so that they may be able to do even better work. That is playing the long game and is not an easy choice to make when so many companies are choosing to eliminate health care benefits and send their employees to the public exchanges.

Yet for us it is the right choice – a strategic choice.

I also believe playing the long game requires courage. Take investing in pre-school, a subject near and dear to me. And I know that many members of the DEC are very active in this arena.

General Motors, for one, pledged $27 million to the United Way of Southeastern Michigan to establish a “Network of Excellence” that includes helping to advance early childhood education in metro Detroit, with the aim of ensuring that 80 percent of children in the region start kindergarten ready to learn. Ford Motor Company has similar initiatives through its foundation. You don’t invest in pre-school because you’re interested in the short term gains.

And it takes courage to invest in something that won’t pay off until after you’re long gone. Yet for many of us – like GM and Ford – and my company – it’s the right choice. It’s a strategic choice.

The fact that some kids go to pre-K go because their families can afford it and other kids don’t go because their families cannot … creates a rift between “the haves” and “the have-nots” before formal public education even begins. We see the consequences down the line, and that’s a shrinking pool of applicants years before most workforce development efforts begin.

In reality, you can go into a fifth-grade classroom today and think: “One out of four kids will be employable. We’ll have to pay for the other three.” Pre-K schooling can help boost the chances of those three children to succeed because they start to learn earlier.

But it’s not an investment that will pay off in three to five years. And it’s investment that requires vision, patience and courage. It requires a long view – and it’s why the leader of any organization has to have the longest view of anyone in that organization.

Everyone around the leader will likely have a shorter view. To be a bit nautical - The long game leader is the one who has to stay the course, keep her eyes focused on the horizon, stand into the wind, make those tough and unpopular choices, and lead.

In summary, you should know that Mischel followed those original Marshmallow Test students for many years as they went through school and into adulthood. He found that those in the 30 percent had higher SAT scores, lower likelihood of obesity, handled stress better, and generally were more successful in a range of other life measures. Their ability to play the long game held true as they grew up.

So tell me – what is your touchstone - what marshmallow are you going to eat?

And where will your business be when you reach the horizon?

About HII

HII is an all-domain defense and technologies partner, recognized worldwide as America’s largest shipbuilder. With a 135-year history of trusted partnerships in advancing U.S. national security, HII delivers critical capabilities ranging from the most powerful and survivable naval ships ever built, to unmanned systems, ISR and AI/ML analytics. HII leads the industry in mission-driven solutions that support and enable an all-domain force. Headquartered in Virginia, HII’s skilled workforce is 44,000 strong. For more information, visit: