the “truth” about growth niri senior roundtable december 10, 2010 ed hess professor of business...
TRANSCRIPT
THE “TRUTH” ABOUT GROWTH
NIRI Senior RoundtableDecember 10, 2010
Ed HessProfessor of Business AdministrationBatten [email protected]
1
THE DNA OF GROWTH
2
RESEARCH FINDINGS
5 research projects
The Organic Growth Index ( “OGI”)
The Characteristics of High Organic Growers (“HOGS”)
The Challenges of Managing Private Company High
Growth
The Myths of Growth
The Risks of Growth
3
WHAT DO WE KNOW ?
Commonly held beliefs about growth are not supported by research and at best are half-truths
There are many ways to create earnings and all earnings are not equal
Short-termism dominates the capital markets
Stock ownership has been replaced by the “renting” of stock for the short-term
4
WHAT DO WE KNOW?
Consistent linear corporate growth is rare
Short-termism drives bad behaviors
Executive compensation generally is aligned with short-
termism
Earnings games are alive and well: GE and Dell settlements
with the SEC
“Spin” can become fraud: Dell and Citigroup SEC settlements
5
WHAT DO WE KNOW?
Growth and Innovation are complex people
dependent processes
Growth and innovation are not linear mechanistic
processes
6 different research reports conclude that above industry average or average GDP growth occurs in less than 10% of the samples studied
6
WHAT DO WE KNOW?
Consistent above average growth for seven years or more occurs less than 3 % of samples
Sustainable competitive advantage is a dying
strategic theory
Growth is much more than a strategy: it is a System
Growth results from the right leadership, culture,
and processes
7
WHAT DO WE KNOW?
Growth results from experimental learning
Good growth companies have high employee engagement and are customer centric
Good growth companies create a 2 X 2 X 4 Growth Portfolio
Growth can create material risks that if not properly managed can lead to value destruction: Toyota, Starbucks, BP
8
CAN THIS BE TRUE?Our Capital markets are controlled by short-term
interests that do not care about the long-term health of your business;
Executive compensation has been aligned with those interests;
We have a large professional services industry ( lawyers, IBs, management consultants, accountants) whose income depends on volatility and transactions not stability and patient growth; and
All of this is masked behind the theoretical concept that the sole purpose of a business is to create shareholder value now regardless of the long-term ramifications.
9
SAD BUT TRUE?
Does Wall Street control the investment policy of
U.S. business ?
Has the fundamental principles of capitalism as espoused by Adam Smith been corrupted by short-termism and sole stakeholder theory?
How are the assumptions underlying our capital markets reconciled with the realities of business growth and innovation?
10
THE ROLE OF INVESTOR RELATIONS
Let’s explore this together taking into account the above and the SEC settlements with Dell and Citigroup?
“Strategic management responsibility that integrates finance, communication, marketing and securities law compliance….that contributes to …fair valuation”
11
QUESTIONS
Does the SEC view IR as a financial disclosure quality control function?
Is there a conflict between what the SEC wants (“fair”) and what your “shareholders” want (‘high”)?
Is there a conflict between what the SEC wants and what some executives want ? Dell case
Does who you report to increase those conflicts?
What are the implications of the Citigroup SEC case for you?
12
QUESTIONS
Do these SEC settlements make knowledge a personal risk ?
Does a company have a duty to disclose the character or quality of its earnings?
Do you have an independent duty of due diligence to confirm ?
Should IR report to the Board of Directors or the General Counsel ?
How does the recent evolution in corporate governance interact with the notion of short-termism and growth?
13
IS YOUR PROFESSION UNDERGOING A SEA CHANGE?
From communications and marketing
To fiduciary to the public ?
Or, fiduciary to whom?
Where is your ethical compass?
14