Running Companies
On February 20, 1998 the chief executive of Mercury
Energy was on his way to a celebration honouring his accomplishments. Having
quadrupled the profits of his company in four years, and halved the staff in
the same period, he had achieved a lot. But on that day the last of the four
underground cables supplying power to Auckland's Business District failed, leaving
Auckland's Central Business District in the dark.
The power outage lasted for some 52 days and ultimately Mercury Energy went broke under the pressure of lawsuits. The problem was attributed in many circles to the deregulation of the electricity supply industry.
There are a number of criteria that companies use to guide their policies. Some
use share price (which I’ll discuss later), others market share, others pre-tax
profit whilst companies such as The Body Shop have other criteria. Whatever
criteria are used, keeping the company afloat is a prerequisite. In the case
of Mercury Energy it wasn't so much privatisation as simply bad management that
caused the problem. They based their policies on short-term expenditure rather
than the long-term situation. This is a common problem with companies that suffer
from poor management, often run by accountants.
The perception that state-run companies don't suffer from these problems has
an element of truth, but generally they suffer from different kinds of problems
– for example inefficiencies, empire building and buck passing
Many companies use their share price to dictate their policies. Until recently banks in Australia were closing branches in small towns. The reasoning was that on paper the income per employee from small branches was very much smaller than income in large branches or in the head office. As one bank closed its branches it raised the income per employee and therefore the share price looked better. In order to compete, other banks followed suit. Eventually, partly due to the public outcry, and partly due to other banks grabbing the opportunities thrown away by the closed branches; the big banks backtracked.
What's interesting in all this is that the share price is governed by what people
are prepared to pay for shares. These people may not (and usually don't) know
anything about running a bank. Yet these people are determining the policy of
the banks. This is obviously not confined to banks. Frequently management modifies
their corporate policies in order to raise the share price, even though this
may mean adapting short-term expediency rather than long-term aims. Even worse,
it may mean adapting policies that make no commercial sense at all. This was
a common phenomenon during the ‘tech boom’ where shares boomed simply on hype
with nothing to back them up.
Intelligent managers run their companies according to good business practice
and know that in the long term their companies will succeed and the share price
will follow. Intelligent share purchasers (such as Warren Buffet) buy their
shares based on the basic fundamentals of the company, including its management
and they don't attempt to influence the running of the company.
