Business, a Maverick view. Over the course of at least two millennia, humans have been working out ways to work collaboratively on a collective endeavour, seeking fair ways to organise themselves. Commercially today, most businesses, but not all, choose to go down the route of limited companies owned by shareholders. The largest may have many millions of shares, the smallest may only have one.
I think it is sometimes worth stepping back and looking at how that came about and what constraints and challenges it creates. Like so many things, the Romans were the first to create something that we might recognise as a “company” today. The Dutch East India Company was one of the, if not the very, first company to have traded shares. It was in 1844 that the “Joint stock corporation act” that shares really started to take shape. It was from this point the idea of limited liability, protected shareholders from risking more than their initial investment and in which the ownership of the business could be divided into shares, and those shares bought and sold.
Business a Maverick view. Today, the trading of shares is a massive global driver of sentiment as well as flows of capital, and of making money without actually having to produce anything. Personally I don’t think that was in the mind of those who invented the system. Of course companies needing to raise money can and do use shares to help facilitate that, and rightly so. Yet, for most small businesses, shares are not seen as an investment opportunity of significance, they are not traded, and they provide for other purposes too.
Yet when we consider the business environment the challenge is the short-termism that shareholder driven decision-making forces into, particularly, larger companies. Over time, shareholdings as an investment have meant that those who have to protect large sums of money on behalf of others have a tendency to buy shares in large, successful, resilient (apparently) companies, that are considered “low risk” but which provide a regular income in dividends.
The biggest single group of such investors are pension funds. The larger the company the more of the shares tend to be owned in this way, and decisions taken by a tiny group of pension fund managers. That isn’t a balanced influence. They demand a steady flow of revenues (to pay their pension liabilities) and steady growth in the fund to meet inflation and their costs. When business income is falling the pressure is for rapid change, usually by reducing costs, not to invest in the future of the business.
I work with small business owners many of whom are also the only shareholders in their business. They have an advantage over all the larger companies, in that they aren’t bound by pressures from shareholders and can much more easily take long term decisions.
That’s a boon for strategic success.
Yet, the impact of the larger businesses retrenchments to meet shareholder demand, is that demand for small business products and services falls too. Either our customer, or our customer’s customer, stops spending money and the small business environment feels the pinch.
In today’s world, a large company CEO has about three months grace, when results turn away from the promises of dividend yield and capital growth. Any more than that and the clamour from the pension funds starts to build. In theory, it is our money, in practice, it is not. In a small business there is also a short window to address changes in the market, and that’s why I work with clients to clarify their strategy and plan for the risks that they face. It’s that combination that makes a business reliable and sustainable.
Shareholding in larger organisations has become about the value of the paper, and the value on paper, today. I would content that is not the real value of a business, nor is it related to important values – values of how people are treated, of sustainability, of the impact on the planet and so on.
Business a Maverick view …
Better cannot mean ever increasing dividends, or ever increasing growth, that’s a short term fix only. Whatever your personal opinions I would contend that to build a better business it has to be one that can be consistent and reliable, that generates fair value, that treats others with respect, and treads lightly, sustainably, on the planet. Within those constraints, those strategic imperatives, I contend it is where your better business can be.
A business that is better for you, better for your customers and better for the world. Let’s talk about how you can create a business of which you can rightly be proud.