Corporate Alcoholism

I was talking to a friend of mine who told me how he refers to his work experience not as 20 years in his company but as 80 quarters. So, I asked him why. To which, he replied with a huge smile, "This company lives and dies by the quarter and has been doing so ever since I joined. There is no change. At the end of every year, we believe that the new year will be different where we will be able to plan better. However, the market thinks otherwise. We seem to be working for the investment bankers and their quarterly shenanigans". 

In India, liquor is sold in bottles that can hold one-fourth of a litre. They are also called "quarters".  What a coincidence!!! Corporate executives and alcoholics seem to be living by the quarter.  I thought I will call this corporate alcoholism.

While focusing on the immediate needs of a company and its performance, leaders also need to plan for the long term. Long lasting corporations seem to be those that are unlisted or listed ones that accept that there will be quarterly fluctuations.  There are many listed companies that have been around for over 50 years but have lived on a quarter to quarter basis because of the pressure the leadership feels to deliver to the expectations of the Street. While such companies do exist, their leaders have not been around for long.

The Street does not seem to care whether there is downturn in the economy or the industry is going through its downward cycle or the company is facing some issues. It wants returns and it wants companies to turn in more and more profits every quarter. This has put tremendous pressure on leaders as their compensation, their reputation as leaders and performance are judged by the Street only on this one criteria - growing profitability quarter after quarter.  I have seen many leaders, therefore, sacrifice long term sustainable profits for short term measures.

For this reason, many leaders are now thinking whether it is worth the while chasing illusory profits because some investment bankers want it.  They are asking for a reporting that is just not profits which caters to one stakeholder called the shareholder. They want to be judged on sustainable returns to all stakeholders - shareholders, employees, customers, suppliers, society in which the company operates, etc.

Such a measure then challenges what most leaders have been taught in business schools - Maximize Shareholder Wealth. It is not any more about shareholder wealth only but reasonable stakeholder returns which includes the society in which the company operates.  Leaders have grown up thinking that maximizing shareholder wealth is their only mission and suddenly that tenet is being challenged.  Further, investment bankers are worried because suddenly the money they make on scrips and options on these scrips (or vapour ware as I call it), seems to be under threat.  So, such measures, while being the need of the day, may not see the light of day for sometime to come.

What we need is for Governments of the day and Accounting Bodies to come up with reporting and disclosure standards that talk of returns to stakeholders.  We also need theories on stock valuation that are based on long term returns to stakeholders and not just maximizing shareholder wealth. Price to Earnings (or P/E) ratios should be restated as Price to Stakeholder Returns ratio. Such a move, though difficult now, is something that all of us should push for to get rid of this corporate alcoholism.