Who Runs Business

I have just been reading Robert Peston’s book Who Runs Britain? I recognised many parallels with Who Runs Business? With the Internet expanding the voice of shareholders across blogs, news sites and forums, is logical decision making being crowded out by shareholder pandering to silence the hounds.

Just how much time is spent in business fluffing a shield around reality to reduce it to a something more readily digestible to the shareholder. Have we gone too far in giving the shareholder more power than the CEO and his/her executive team?

When we look at the forces exerted on a business every day, they not only exceed in number those forces experienced 20 years ago, but they are of greater magnitude and are infinitely more complex. Yet shareholders demand that the response be fast, profitable and socially responsible.

Whilst there is a need for a balancing system to ensure that the fraud and poor practice that brought many a good company to its knees over the past is stamped out, it’s getting a little out of hand. The demand and greed of shareholders can drive businesses to make bad decisions. And when it all turns sour, who are the first to complain? That’s right – the shareholders.

For instance, look at the financial mortgage market. Shareholders were demanding continued revenue growth at any cost, resulting in lower cost loans and lower equity mortgages at lower interest costs. Even four years ago, the logic didn’t stack up. Yet a plethora of young couples, that not long ago purchased their family home, were now buying rental properties. It didn’t take a financial wizard to recognise that the sums may add up now, but that the model was not sustainable. Many mortgages were taken at 90%-110% of valuation at 6.5% interest. A few years later and the market is flooded with rental properties. With falling rent rates coupled with falling property values and higher interest at around 9.5%, the mortgage repayments have not only increased on the rental property by 50 percent, but also on the family home. Both are now in peril, and mortgage companies are falling off the perch with weekly monotony. The impact will fall not only on the home owner but on the financial lender, as equity value is now below the outstanding mortgage.

So what drives businesses to make such stupid decisions, when presented with clear data that the decision is not only unprofitable, but non-sustainable. Somewhere in the background will be shareholder demand for increase in revenues and customer numbers. But few demand sustainable profitability. Is profit now an off balance sheet item that is magically expected to fall out of the equation.

Given that the people running these organisations are not stupid – we have to ask, just who is running business today?

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