I’m seeing a lot of companies that had tremendous growth over the past 3 years and at the first sign of “unmet targets” they take drastic measures (I.e. letting go of workforce). While their investors might indeed lose their confidence, sell their shares and, therefore, decrease the overall firm value, companies have made and still have lot of money in the bank, why do they need to care about growth, share price and what investors think to such extreme extents? Wouldn’t it be ok to just go with “we did not grow a single point this year and we have made the exact same profits of last year, that’s really good!”
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You’re making a non-existent distinction between the investors and the company. In reality the investors own and control the company and it only exists to enrich them. The investors can vote to remove board members, fire the CEO, institute layoffs or anything else legal that a majority agree to. Since the board of directors and CEO only serve at the pleasure of the investors they’re very reticent to piss them off by costing them money.
Not gaining as much growth is an indicator that things are not fine and to expect even less growth in the future. So investors get scared and start pulling out. This can be a self fulfilling prophesy. But it is more complicated then that. The executives in the company usually have bonuses tied to the company growth objectives. This is basically the shareholders telling the executives that they get paid only if they get the company growth they want. When the company fails to meet these growth objectives but otherwise does fine the executives does not get their bonuses which can be a substantial part of their pay. It is easier to fire a number of people, stop spending money, sell a lot of equipment, etc. in order to make the profit goals making it look like the company is still growing so they get their bonus. They can then use this success to get another job at a different company leaving them with a big bonus and a better paying job. Some of the investors might also be inn on this scheme trying to make the company look like it is growing without limits so they can sell it to other investors. Basically nobody care about the company next year as they make their money this year.
It is rare that a company (other than a small one in a very fixed market) spends their money exclusively on current business. For a company to grow quickly, it is almost certainly investing current revenue into future growth products and markets.
If current growth is close to zero, then it is very likely that prior investments into growth have not succeeded as expected. The company very likely has to reassess their internal investment and future product plans. The investors/shareholders own the company so they may require the management to adjust their plans accordingly.
Think of it this way. If someone goes to school for some time and takes a test and fails, the simplistic statement is that “they failed the test”. The deeper answer is that they failed to spend the time properly to learn the material required to pass the test. You want to look for the root cause not treat the symptom.
Similarly, failure to grow could be a sign of failure to plan and invest properly in the past – the lack of growth is a symptom.
If you’re invested in a company, you’re hoping to make money. Specifically, you’re hoping that the share of the company that you own will go up in value.
If the company is telling you that they’re not a good investment, you’re going to want to pull out your money and invest in something I think is better.
> Wouldn’t it be ok to just go with “we did not grow a single point this year and we have made the exact same profits of last year, that’s really good!”
Except it’s not okay, because capitalism is irrational. Hell, there’s a famous saying – ‘the market can stay irrational longer than you can stay solvent’.
Capitalism, as an abstract concept, requires and expects eternal growth. It doesn’t even matter if you’re the only company in a market – a literal monopoly – if you’re not growing year over year, you’re in decline.
Why? in a word, inflation.
Inflation means the dollar I earn tomorrow is worth just that much less than today. So in your example, if I made the exact dollar amount this year that I did last year, *not accounting for inflation*, then my revenue has gone down when I *do* account for it.
But when you start getting really big, you start to pick up really interesting efficiencies, which we call economies of scale. Things like ‘oh I can just combine all my distribution into one place and serve all of my locations from there, reducing how many places I need to keep up’ suddenly make a lot of sense, so you can reduce costs there and still charge the same, increasing revenue.
Eventually, though, you’ll have maxed out these, and you’re left with finding more customers. Maybe if you reduce your cost *just a little* you can tempt in 1 more customer – in all likelihood, the cost reduction was less than the value you got from one more sale, so its a net increase.
But even then, you’ll start to hit peak saturation. There are only so many people who want a widget, who need a widget, who can phsyically buy a widget. You’ve hit economies of scale, you’ve optimized your price to consumers, and you’ve saturated your market. And yet you still have to combat inflation somehow…
But the stock market sees your stagnation, and looks at the *cheapness* of this little up and coming competitor – someone you hadn’t even deigned to *recognize* as competition, they’re so small – and go ‘well OP’s company makes all this money year over year, maybe this one will to. And look! I can get in on the ground floor for CHEAP!’. So tehy sell your stock and go all in on your competitor. No, it’s better to give them a reason to stick with you every year.
The companies are OWNED by their shareholders. Ultimately, the shareholders, operating through the Board of Directors, are the people who control the company. The executives who decide that they don’t care what’s good for the investors will rapidly find themselves out of a job.
And, some companies really aren’t growth companies — they spin off a steady dividend to their shareholders. If that’s what their shareholders want, then the shareholders may keep the company from trying to grow. Why? Because growth involves taking risks, and those shareholders might not want those risks.
> Wouldn’t it be ok to just go with “we did not grow a single point this year and we have made the exact same profits of last year, that’s really good!”
If you invested your money in a company at the beginning of the year, and at the end of the year had the same amount of money, would consider that a good investment? Especially when there are zillions of other companies that would have provided an actual return?
A company is owned by it’s investors. It has a legal obligation to act in it’s investors best interests and the Board of directors can be sued in court if investors believe they are not doing so. The primary reason investors invest in a company is to get a return on their investment. If the company they invested in decided it wasn’t going to bother trying to grow the value of the company (and hence the investors investment) the investors would take their money to another company that can provide a return
You’re separating owners and investors when they’re the same thing. Why would i give you money if your goal is to stay the same? There is what they call an opportunity cost when you invest in a company. You cant use that money to invest in a different company.
If you want to stay the same you might as well stay a private company then. While not every private company want to stay the same, there are a lot that do and that’s why they dont go public. They want more control over their company.
Many times, a company’s (current) success is predicated by the assumption of growth in the future. Stock prices are a good example of this. Stock price is high because people expect growth for the company, in the future.
For the last question, it depends a lot also on the market conditions. If every single, for example, mortgage company suffered heavy losses due to some unforeseen reason (like a housing crash), and your company was able to “make exactly same profits as last year”, that’s a good thing. Otherwise, if the company “made exactly same profits as last year” in an otherwise healthy market, then that’s cause for concern. Coz the obvious question would be “if your competitors were able to grow in this market, why couldn’t you?”
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