I know this may sound very silly, but there is something that bothers me to no end - "What would change in our lives if businesses didnt get judged every quarter?" - Would business leaders produce better returns for investors over the long term rather than trying to continuously meet unrealistic short term expectations of spectacular financial results?
When I read the news about companies registering profit drop or increase compared to last quarter or last year same quarter, I ask myself one question - So what?.....I mean what are you trying to say here? How are the fundamentals of a company getting better by delivering these short term results ? Companies will cook up financials, sales guys will sell to wrong people or sell wrong things this quarter, people will cut into investments made in sincere people half way through just to meet cost cutting targets - just to please a few brokers of greed ? Would love to hear what you feel?
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I have wondered this myself but when you come to think of it, given the Enron/s and Satyam/s of today, it is hard to imagine what you are proposing here. More than just posting results for investors to judge and affect the stock price, businesses struggle with the oversight and regulation that governments place on them.
ReplyDeleteIt would be totally interesting to see what would happen if businesses were given a free hand to just produce long-term results as opposed to the quarterly pressure, but then as an investor, would you be willing to take the risk of not knowing what was going on in a public company until the situation gets out of hand and the government then has to step in anyway?
I doubt any business really is trying to improve on their fundamentals to begin with, they are just making profit so their executives can pocket fat pay and bonuses based on market standing...so I feel the whole point becomes moot then!
I am sure there must be better ways to help companies who genuinely want to work on the basics/fundamentals of their business so that they have a long-term sustained growth based just on pure basic principles of business as opposed to short-lived spikes.
Thanks Nikhil for a refreshing thought on the business and initiating a debate on whether actually we should depart from the long term strategic objective and only concentrate on Q to Q result and I think this type wide of the mark Q to Q methodologies has played it’s part and is major contributor for current economic slump.
ReplyDeleteAs companies become mere short focused they indulge into an aggressive mode to beat earlier quarters and in the process ends up in bankruptcy.
Agressive Investor mindset drives business leaders and executives to run into the Satyam and Enrol alley. Infact, it will be interesting to see what the investors are doing to help the company produce the kind of unrealistic results on a quarterly basis. I think its important to measure results every quarter, but who is going to objectively look at "what causes those results"? and "Are they repeatable?". One potential way to ensure that investors become true owners rather than just greedy speculators is to lock their investments for a minimum period of 3 years. No one should be allowed to buy or sell any share within 3 years.
ReplyDeleteHi Nikhil,
ReplyDeleteI believe it is important to judge periodically. What equally counts is - what parameters are you judging on and how effectively you are able to collect the information to be able to make a reliable judgment.
There is no problem in judging. However the judging should focus on improving something rather than on justifying something.
I think that is where a "Balanced Scorecard" comes into play.
If companies took that to heart rather than just having in in the head, judging quarter on quarter would not be as bad as it is probably made out to be.
Would like to give an analogy.
Suppose a student scored 100/100 in theory exam and failed in practicals.
If this happens, I would not say that the "student has failed". I would say that "BOTH THE EXAMS HAVE FAILED" because neither gave a true and complete picture and both results put together looks ambiguous.
Jincy. Good points. My point of view is not so much the periodicity of judgement but what is the judgement based on. As I have been thinking about this subject and validating with folks in the Industry, it does seem like most businesses are investor centric rather than customer centric. Unrealistic expectations accepted by the Boards and CEO creates the organization behaviour disorder that we see today.
ReplyDeleteMany companies (who I have now come to call as money making machines) start and end their reviews at most levels with how much money will we make this quarter, never about what do our customers need and how can we help them become a better business!
To me thats fundamental business ethics going wrong.