It may sound strange, but growth was, for many organizations, a way of life. Managers fought to postpone the reaching of their Coase Ceiling, or to avoid necessary changes. We even created a word for this unlimited growth: “globalization.” It was, often, not natural growth, but growth from “buying” market shares. The newly-bought corporations were quickly integrated in the existing organizations, and the hunt for new takeovers started all over again, with, as a management mantra, “the takeover is justified by the advantages of the increased efficiency, with a higher profit potential as a result.”
It works alright…
If the transaction is done from the existing cash flow.
If the integration is a smooth process.
If the synergy advantages are a reality and not wishful thinking.
If the Super Mario leader, the loner at the top, the Wizard of Oz, can keep the whole operation under control.
If the markets keeps on growing.
But, if the takeovers are financed with borrowed money, the integration is less simple than assumed, and the short-term shareholder thinking, stimulated by big management bonuses, prevails, and the Coase Ceiling arrives soon!
Organizations start to produce “commodities,” where all goods or services look alike, added value disappears quickly, and creativity and innovation are killed. Marketers stumble upon each other with slogans like “new” or “improved,” and have no other option than to start competing on the price.
Organizations have become so big that operational costs are out of control, which signals the entrance for more controllers, hatched managers, reorganizations, and lay offs. Corporation headquarters are far away from the battle zone, and they create their own bureaucracies.
“Organizations no longer fit reality,” states the management thinker Peter Drucker in his Theory of the Business (1994) to describe organizations going through a Coase Ceiling. One could say that shareholders, seeing this happening, should or could intervene. However, over the past decades, the role of these commercial organizational owners, has changed. As a result, the roles of the board of directors and management of these organizations also has changed.
In the old days, shareholders, often being the management or direct representatives of the owner-families, may have been dictatorial or autocratic, but they had a direct relationship with the company. Think about the beer brewery Heineken, in which the family still plays an active role. If a company like this went under, these people would lose their assets, money, and social respect. In short, they are playing a game with their own future at stake. That deserves a premium, like a decent dividend.
Over the past decades, however, the distance between the shareholder and the organization has increased enormously. Shareholders play with the stock market, and put their money into index portfolios. When a company in Pakistan, China, or Vietnam goes under or is closed down, the shareholder, or better known as the investor, does not even notice. His shares are in exotic funds, like “Far East Accelerator Futures of The Global Green Speedy Growth Fund.” As investors, the shareholders keep a safe distance from the organization, itself, and delegate all responsibilities to portfolio managers, business banks, supervisors, and management.
But this investor wants an ever-increasing, short-term return on investment, with less risk and involvement. But wait – that is what portfolio managers, business banks, supervisors, and management also want, although these individual interests may conflict with the interest of other stakeholders, like the employees.
Also, a smaller investor can be a nuisance. Organizations have created all kind of barriers to deny these investors any influence. There are shares without votes, and shares getting more profit than others. Some shares are placed at more “friendly” administrative offices than others. All in all, the distance between the average shareholder and organization has become greater and greater.