Companies Lack Accountability

I once overheard a coworker informing his friend that he was ecstatic that his entire 401K portfolio dropped by -15% in just over a few months. Hearing a reaction like that would have baffled any eaves dropper; I know I was. What investor on earth would love to hear that his lifelong investments had dropped by 15% in a matter of months? I certainly would not be pleased. However, the missing key detail to this story is that this happened in late 2008, when most people’s 401K dropped by about 30% when the house of cards at Wall Street started to crumble.

Over the past decade, many companies reaped recorded revenues and profits. However, things have drastically changed in the past couple of years. We are in one of the worst recessions in over 70 years and many companies are now struggling to survive. Many businesses have either faltered (e.g. AIG, Washington Mutual), went bankrupt (e.g. Lehman Brothers, Mervyns, Circuit City) or simply operating in the red. As such, I fail to see why some companies, who are actually making profit in this crumbling economy, feel as though their profits “must” grow at a certain percentage over the previous year.

I understand why companies should forecast increasing profits: to satisfy investors. However, growing profits at 10% each fiscal year should be an average target. In some years, companies should forecast growth rates above 10% while during other times they should forecast lower, depending on the market. If one agrees that companies should increase expectations if the market growth rates are high, then the opposite is true; companies should lower expectations when market growth rates decline. For example, if the consumer PC market is growing at 20% a year, then companies like HP should be targeting growth rates of at least 20%. However, if the PC market is declining at a rate of -10%, then HP should be content with growth rates of 0%. Through many business cycles, companies should be averaging growth rates at a particular rate, like 10%. Unfortunately, this is not the case. Many companies choose a certain growth rate percentage (like 10%) and stick to that number no matter what the market condition is. Companies view this “growth rate” like it is some magical number and going below that number spells doom. Much like how gas price fluctuates everyday according to supply and demand, yearly growth rates should always be changing with the market. Ralph Emerson said it best when he said:

“A foolish consistency is the hobgoblin of little minds”

When company growth rates do drop, then they often use the “we must please our stockholders” excuse to lay employees off, despite what is going in the rest of the market. As long as a company outperforms the market, investors are generally happy, much like the coworker whose 401k declined by -15% (he beat the market by 15%). I would love to meet a “shareholder” who expects their company to grow at 10% over last year’s record profit levels at a time when the Dow dropped 30% in value in less than 6 months (from Aug ‘08 to Feb ‘09). That is like expecting Michael Phelps to beat his all-time fastest 200m freestyle time in choppy waters.

What I do believe is that the companies who are outperforming the market use the “stockholder expectations” as a way to offset the responsibilities of downsizing off of the executive’s shoulders. I do not believe that downsizing should always be avoided, but decision makers should take responsibilities for their actions. It is another way to displace accountability to a scapegoat with no face. Why take the blame when you can point the finger at the one armed robber who got away?