Growth obsession—the new corporate disease?

Although many companies’ growth rates are being hurt by the economic downturn, many are still making bigger profits than in previous years. Are their predictions of doom exaggeration or mere blindness?

Reading the fresh annual reports big companies are now publishing, it strikes me as odd that most of them are predicting such doom.

True, the end of 2008 began to show the first signs of a serious downturn in business and the whole economy. The problem, however, seems to be that the companies are somehow fixated on their growth rates rather than the actual income they are earning.

I find this strange, because they may actually be earning more than before.

Let’s look at a hypothetical company whose operating profit was 10 million dollars in 2007. In 2008, they made 13 million dollars, 30% more than the previous year. Now their prediction is that the operating profit will grow “only” 10%. That’s down 20 percentage points from last year – horrors! The result: panic, budget cuts, massive layoffs, closing down factories or production lines.

But what really happened? In 2007, they earned 10 million. In 2008, they earned 13 million. In 2009, they predict this measly 10-per cent growth, which in figures will be 14.3 million – more than in two years!

In their opinion, they were doing magnificently in 2007 and 2008, and kept their stakeholders happy with reasonable dividends. The question immediately presents itself where have they now suddenly started wasting money if the stakeholders can’t be kept happy with the best operating profit in two years? Let’s also remember the stakeholders were probably ecstatic about the great performance of the company even those two years ago.

Of course, it makes perfect sense for investors to require continuously more. That’s why they are in business. On the other hand, more is exactly what they are getting even this year, although not quite as much more as before.

So, are the companies blinded by the wrong figures? Or are they just exaggerating the gravity of the situation?

Please let me know your views. I’ll also be more than happy to have my logic poked full of holes, be my guest. Click on the comment button below.

Comments

  1. holytornado - March 24, 2009 @ 11:44

    There is a mistaken belief in the notion of continuous growth. This belief has and continues to result in the boom and bust cycles many companies go through. In reality, doing the same amount of business in a year should also be considered good, especially if it is expected to be a difficult year.

    The endless profit motive is a dangerous one for companies as it:
    a) is wholly unrealistic (even monopolies go can bust so being at the top doesn’t help
    b) ensures that at some point your product quality will suffer as you continue to drive production costs down
    c) ensures that your customer loyalty suffers as you continue to cut customer service staff or outsource or even automate
    and d) ensures that your employee loyalty suffers, as you continue to shed them in each bust cycle.

    Unfortunately, it is not just shareholders who create this unrealistic disastrous cycle, but rather the CEO’s themselves. Or more preciously, it is the way CEO’s are hired and rewarded. There are too many short-term CEO’s on the market. If a CEO is not in it for the long-term, watch-out. He’s in it for his own personal gain and will ultimately undermine the company to ensure personal wealth. If boards continue to reward CEO’s based on quarterly share price and profit and not long-term business health and strategy, then you ensure that he’s only going to focus on share price and profit. If you reward with stock that is convertible in less than two years, he’s going to pump up the price anyway he can, ultimately resulting in points a-d above, realise profits at the expense of the real corporate health to drive share price, then cash out and walk to another job.

    Company boards should instead follow the Japanese model and recruit long-term or even lifer CEO’s, people who will stick with you thick and thin and keep their eye on the future of the business as measured in years or even decades, not months. Leave that to lower-level directors.

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