
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: WEDNESDAY, March 25, 1992                   TAG: 9203250358
SECTION: EDITORIAL                    PAGE: A-9   EDITION: METRO 
SOURCE: DONALD N. FREY
DATELINE:                                 LENGTH: Medium

CORPORATE VISION

RECENT REPORTS indicate that spending on research and development by U.S. companies is falling while foreign firms increase their R&D efforts. The reports are an alarm bell for our future. If the current recession has taught us anything, it's that we cannot focus just on immediate profit to the exclusion of longer-term success without risking our jobs and prosperity.

U.S. businesses obviously need to be responsive to short-term challenges and opportunities. But they cannot survive over the long haul unless they also pursue new technologies and innovation.

Some U.S. firms, such as those in the pharmaceutical, aerospace, chemical and food industries, have become adept at deliberately pursuing and profiting from long-term innovation. But a committee of the National Academy of Engineering reported recently that a shorter-term focus too often remains the norm and a major source of competitive disadvantage.

Corporate executives, who report to stockholders, can be encouraged to take a longer view. They now often are rewarded for acting shortsightedly.

Imagine that you are a business leader deciding whether to start a new product development that could help your company beat its foreign competitors. Initiating the project will reduce profits this year and thus cut the size of your own performance bonus.

It would take a person of considerable vision - or, even better, wealth - to accept such a personal loss in favor of the company's long-term vitality. Yet that is precisely what many executives are expected to do. They are given little incentive to commission research or other initiatives likely to blossom after they retire. Their pay and reputation are based upon what they accomplish now.

For the sake of millions of American stockholders (and workers), corporate boards should develop compensation plans that induce their executives to adopt longer time horizons. How? Managers might be given stock options that cannot be exercised for several years, incentives tied to long-term company performance, and penalties for cashing out sooner.

More-sensible compensation packages are only part of the solution. On a national level, we need to lower the cost of investment capital. Potential measures include cutting the federal deficit, reducing capital gains taxes and "double taxation" of corporate profits, and promoting personal savings.

Although the recent R&D figures are sobering, there are signs that at least some companies are getting the message. One corporate board on which I sit recently had a meeting at which someone suggested the R&D budget be reduced. A fellow board member replied indignantly, "What do you mean, cut the R&D budget? If you try to increase earnings by doing that, you're just liquidating the company!" That's something I'd never heard before in a board meeting.

Nor, until recently, had I heard a board ask to review the firm's research budget, or an employee take time to describe some new machinery in the factories. In the past, the discussion rarely got beyond financial matters.

So there's reason to hope that some companies finally are focusing on these nuts-and-bolts concerns involving technology, quality and the shape of the future. But regardless of what the federal government does, our country's prosperity depends on many more firms extending their investment horizons still further.

Donald N. Frey is a professor of industrial engineering and management sciences at Northwestern University.

by CNB