Maybe I am being naive but working in a private equity backed business makes me wonder about the effect of quarterly reporting on capital markets. Living and dying by sales forecasts, revenues and margins quarter by quarter and always considering what the market will think before deploying capital is debilitating for a board of directors. Lets look at both sides of the equation:
Shareholders need to keep management teams focussed on generating value (cash) which has a twofold effect, capital appreciation of the shares in the firm plus the opportunity to share in the profits via dividend. In capital markets this tends to be translated into quarter after quarter relentless growth in revenue and profit. So the CEO of a public company needs to take a fairly short term view of what needs to be done to keep his job and earn his bonus.
On the other side of the coin there are a number of alternate approaches where such tight quarter by quarter controls are relaxed:
- Venture Capital backed startups
- Private Equity Companies
- Some Privately Owned Companies (hardwood forestry, wine producers and other firms with long investment cycles)
- Certain Japanese Corporations
Each of the above business models are well proven to drive growth and increase shareholder value but without the discipline of quarter by quarter reporting to a skeptical public market. In all but the last there is a great deal of alignment between ownership of the business and management of the business. (Perhaps Japanese firms are a special case that I don’t understand yet).
So, are capital markets killing capitalism? What do you think?
