Wednesday 15 February 2012

Short-Term Focus May Mean Long-Term Damage

With the current debate about bonuses, many people may not remember Sir Terry Leahy’s comments in 2010 which echo my observations on our markets in my posting on “market efficiency” in 2010. I’m not saying that scrutiny by investors is a bad thing, but as Leahy puts it, pressure on boards to “do what is right for the market” can be counter-productive as short-term focus on returns doesn’t always coincide with the general long-term good of the company.

During the 13 years that Leahy was Chief Executive of Tesco, its entire market capitalisation was traded more than 15 times (which is apparently low compared with other FTSE companies). “Market capitalisation” is the total number of shares in the company multiplied by their price. This means that, during his tenure, the value of sales and purchases of Tesco shares exceeded the market value of those shares by 13 times. If we assume that a company’s shares are bought because it is considered a good buy (i.e. “successful”) and sold because it is considered as “not successful”, then market perceptions of Tesco changed more than once a year during Leahy’s time, suggesting that investor time horizons were, on average, 10 months...

A diverse spread in share ownership is good, as it gives access to capital, makes companies more transparent and accountable and ensures for the most part that managers are selected on merit and not on the basis of connections. However, what we often see is that a few institutional shareholders who between them account for large stakes in a company can influence its direction. In light of the comments on time horizons above, investor horizons run contrary to the timeframes required to develop and prove a strategy.

Look at the markets now, and you will see that buy and sell activity is often more “sector based” than company based. In other words, if one company announces poor results, shares in all companies in that sector fall across the board. Markets seem to be saying that all will announce poor results, and that none are fundamentally strong enough to deal with it and create a “self-fulfilling prophecy”, at times egged on by a feeding frenzy of media speculation and hype.

When a company announces that its revenues/profits grew 10% instead of the expected 13%, this is a disaster and its shares fall. So much can happen to impact growth, especially exchange rates now that so many companies are "global".

Tesco outperformed its rivals (ASDA, Morrisons and Sainsbury) in terms of market share, investing in new markets and new businesses such as banking and insurance. Interestingly, Morrisons seems to have outdone Tesco in terms of share performance.

In conclusion, “markets” could be doing more harm than good in terms of corporate performance, egging on top management to take risks to secure their bonuses. It takes courage to persist in the face of criticism by shareholders and market analysts, but in some cases, it’s necessary.

I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.

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2 Comments:

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At 18 April 2012 at 15:02 , Blogger William Martin said...

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