The yin and yang of organizational health
Sustained performance over the long term and successful transformation in the near term require many of the same ingredients.
Actions necessary to support longer-term corporate-performance objectives, on the one hand, and a rapid performance transformation, on the other, might seem at odds. But our research paints a different picture. When coupled with organizational health, long- and short-term performance can become interdependent and complementary—just as yin and yang in Chinese philosophy are inseparable, unable to exist without each other, despite their apparent opposition.
Simply put, healthy organizations are more likely to orient themselves toward the long term. And companies in the midst of a rapid performance transformation boost the odds of sustaining those efforts when they improve their health. The evidence for these propositions is substantial, and it underscores the fundamental link between organizational health and performance.
Health and the long term
Renewal has always been central to our definition of organizational health, which emphasizes a company’s ability to deliver superior financial and operating performance over the long term. Our conviction that there is a link between organizational health and a long-term orientation was reinforced recently when we analyzed a set of 51 companies for which we have rich proprietary data on both characteristics.
Our health data come from McKinsey’s Organizational Health Index (OHI), which aggregates the views of employees and managers on a set of nine key organizational dimensions that have proved critical to health. For long-termism, we drew on a metric created by the McKinsey Global Institute and McKinsey’s Strategy and Corporate Finance Practice that differentiates those companies with a long-term orientation from others. Known as the Corporate Horizon Index (CHI), it assesses five factors, including consistency of investment patterns, earnings quality, and the extent to which companies focus on value-creation fundamentals rather than the targets emphasized by Wall Street analysts.
When we compared the 51 companies for which we have both CHI and OHI data, we found a strong, two-way correlation between health and long-term performance (Exhibit 1). On the one hand, the healthiest organizations are the ones that focus more on long-term value creation. On the other hand, companies focusing on long-term performance tend to have higher organizational-health scores. What’s more, companies focusing on long-term value creation outperform their peers on all nine of the key organizational outcomes that contribute to organizational health. These are early findings; our next step is to identify specific management practices that simultaneously boost health and contribute to a long-term orientation.