Why do companies exist ?


In business school -I was taught that the primary idea of having a company is to maximize returns to its shareholders . There were some essays on the “additional necessity” of stake holder management too .

As I joined the workforce – I was taught that companies exist to make sure customers are successful . My favorite manager of all time taught me “when in doubt, do what is right for the customer”. It made all the sense to me – and I rationalized that if the customer is satisfied and excited , company will succeed automatically .

Along the way, I became a manager and then an executive . And I started getting the employee dimension . The idea of pleasing share holders and customers will work well only if employees are happy and committed to what they do . Yet, most managers have limited abilities to do what is right for employees . I think that is the root cause of lack of growth in a lot of companies .

Yesterday , on twitter – I was reading something on companies buying back shares to boost their stock price . As an investor , this is a pretty good thing to see the big companies spending tens of billions of dollars on buy backs every year . My gut feeling is that at least 500 billion dollars should have been spent by companies in share buy backs in last 5 years . If anyone knows an approximate number – please leave a comment .

I have mixed feelings on the idea of share buy backs . This is money that could have been used for product development , acquisitions , better customer support ,employee compensation etcetera . Whenever I hear about stock buy backs – I think “is it because this company has run out ideas of getting more profitable business from its customers? “. On the other hand – if I have stock in that company, I feel less bad given there is a chance that the market will reward them.

However , after watching the buy backs at big companies like IBM and AAPL having little impact to share prices , I am starting to wonder how long is this strategy effective ? At some point the market will require companies to do actual business to get rewarded . I wonder if it is possible to isolate the impact of buy backs on share prices to see if this is more effective than regular business in driving up the market cap of a company . My guess is that it is not – but then I have not done any real analysis . It’s just an uneasy thought in the back of my mind .

The idea of having share holders , customers and employees happy doesn’t have to be mutually exclusive . Some over lap via getting more employees to be stock owners can help – and some companies do it very well . It is also a good pulse check on whether employees of a company are fans of the company’s vision . Same thing with employees and customers – if better customer satisfaction drives better stock price , employees who own stock will not need to be forced into doing what is right for the customer . They will do it naturally .

PepsiCo CEO Mrs. Indra Nooyi, recently told Forbes magazine that she writes letters to the parents of her direct reports congratulating them for the good work of their kids . I was blown away – my parents have been extremely proud of everything I have done , but I would have never thought of my boss sending them a note to say that I am doing well and they should be proud . What a great idea ! Ok I guess some employees might think that is way too personal for their comfort , but I personally think that would be the sweetest thing a boss can do for parents and the employees .

I wish more managers and executives would take the time to take care of the employees – I know I have ways to go as well . But every time I hear about creative ways other managers use to get their team to develop into better people and better leaders – I get inspired a lot . It’s on my bucket list now to find a way to meet Mrs Nooyi 🙂

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2 thoughts on “Why do companies exist ?

  1. Lots of interesting ideas in this post and which direction to take?

    First on the topic of “why” companies exist – they could be to sell a product, or simply exist to extract shareholder value, but these days many people feel companies should exist to make the world a better place: http://blogs.sap.com/innovation/sustainability/common-wealth-contributions-in-business-0214699#ixzz2YxiyqMjE.

    Now on the topic of how should they spend “excess” profit, as an investor, I like the ideas espoused in “dividend growth investing” where the company feels it’s duty is to provide ever increasing shareholder returns via dividends. This rewards long term shareholders, and ensures the company focuses only on a few business investment opportunities since they have a culture of always providing increasing earnings to their shareholders. Of course this is for companies with mature primary lines of business, and not those with fast growing businesses requiring more investment.

  2. Lots of interesting ideas in this post and which direction to take?

    First on the topic of “why” companies exist – they could be to sell a product, or simply exist to extract shareholder value, but these days many people feel companies should exist to make the world a better place: http://blogs.sap.com/innovation/sustainability/common-wealth-contributions-in-business-0214699#ixzz2YxiyqMjE.

    Now on the topic of how should they spend “excess” profit, as an investor, I like the ideas espoused in “dividend growth investing” where the company feels it’s duty is to provide ever increasing shareholder returns via dividends. This rewards long term shareholders, and ensures the company focuses only on a few business investment opportunities since they have a culture of always providing increasing earnings to their shareholders. Of course this is for companies with mature primary lines of business, and not those with fast growing businesses requiring more investment.

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