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!”
In: 24
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.
Latest Answers