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To Maximise or Optimise Profits?

March 20, 2014

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John A was the CEO of the tightly held public listed company.

The biggest external shareholder was a smallish superannuation fund with 9%. The remainder were 187 loyal investors who held on to their shares and between them held 43% of the share capital. The founder held the rest.

The company’s shares were rarely traded.

The company had a niche market in the technology area, low staff turnover and solid performance.

It would have been a take-over target had the shareholding been more spread. But the founder, now chair of the board, had chosen her shareholders carefully.

The shares had kept pace with the consumer price index, but the dividends were always ahead of bank interest.

Between John and the chair, the company was led with the skill, passion and care of dedicated competent parents who invested in the future of their children, by modelling the work ethics that have stood the test of time for sustainability and natural growth.

Then John and the chair died together in a plane crash and Gary Y became CEO, an external hire.

Gary had been selected by the board because he had espoused the same values as the company – conservative, caring, competent, creative, charismatic.

But Gary was actually a high functioning sociopath, who had fooled the board about his conservative and caring nature – he was the opposite. He cared alright – for himself.

He steered the company towards more rapid growth. At the same time the superannuation fund manager retired and a new manager was appointed with the direction to grow the fund. It was a perfect match.

The company became more aggressive in the market, seeking other niches. The CEO argued successfully to reduce dividends to fund growth, promising a better return on investment, helping the super fund’s strategy.

Next Gary succeeded in a capital raising, growing the shareholders and stimulating trading which saw the shares rise in value, a clever solution for the reduced dividends.

With a more disperse shareholding, the demand for greater profits and growth was inevitable and the company adjusted accordingly.

Productivity increased at the cost of quality. The autocratic leadership style soon disengaged the workforce. Talent left. Then productivity decline was hidden by new business.

Three years later the shares tanked and the company was taken over, the intellectual property siphoned off and the brand disappeared. The original shareholders sold out. People lost their jobs.

One former shareholder was later interviewed.

“The founder asked me to invest in the company because she knew I was an investor not a trader. That’s how she formed the shareholding in the first place, from true investors.”

“Then a new driver came and put his pedal to the metal and ran out of fuel before reaching the destination.”

Not quite the hare and the tortoise story, but close.

When you hear the cry “Maximise profits for your shareholders” you are hearing the cry of greedy traders.

When you hear the whisper of “Optimise for sustainable growth and profitability” you should invest.

What do you think?

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