The Big Lie About Public Companies

Okay. So, once a year, the officers of almost any company you can name, public or not, sit down and try to plan for the year ahead. It's a good idea. It helps you plot a course, and to try and stay on track during the year ahead. It's an opportunity to set goals to improve the business, to make more money, to grow the company. I can't fault that.

But in a public company setting it can be a destructive and misleading exercise later on down the road if things don't go according to plan. A public company is one which has stockholders. The company is responsible to those stockholders to give them a return on their investment, to keep growing every year so the investors remain invested, and to tell them in advance how much money they expect to make for them each year.

Therein lies the problem.

I'm no expert, so feel free to correct me if I'm wrong. But it seems to me that it would be unusual for a public company to plan to make less money next year than it made this year. So, no matter what, their budgets are going to allow for increases in revenue and therefore increases in returns for stockholders. I suspect that these projections have a lot to do with how people decide which companies to invest in. Those investors who trawl the market for high returns and desert those companies that don't satisfy their expectations are the ones which companies are thinking about when they make their projections. They don't want to lose investors. They know they have a base of tried and true investors who'll stick by them no matter what, so it's the risk-taking investors the companies are thinking of when they project higher earnings next year. Mustn't lose investors. Oh, no. Must NEVER lose investors.

So, if it happens, come the first quarter or the second quarter or whatever, that the company isn't making as much money as projected, it's a disaster, and the bean-counters start making noises and sending memos and even making visits to satellite offices for those oh-so terrifying personal appearances. "We're not meeting our budget!" they cry. "We're losing money! There must be cutbacks! You must spend less and earn more! Freeze hiring! Count paperclips! We! Must! Make! Budget!!!"

The funny thing is, the company isn't necessarily losing any money at all. They're paying their bills, paycheques aren't bouncing, the lights are still on. There's a profit being made. ...Just maybe not quite as much of a profit as projected in the budget.

But, you see, budgets are just guesswork. Educated guesses, to be sure, but guesses all the same. They can't account for unexpected changes in the industry, or in the political climate, or social movements or sudden increases in the cost of essential services and raw materials. So if the company budgets, to their best ability in forecasting all reasonable activity in their marketplace, that they will earn one million dollars in the first quarter, and for various reasons, they only end up earning $900k, that's a failure, that's considered to be a $100,000.00 shortfall, a loss, and that's all it takes to get the beancounters saddling up their war ponies. Thing is, maybe it only takes $700k to run the office, pay all the bills, keep the electricity on, do some advertising etc., etc., etc. They've still made a $200k profit. So where's the loss? It's in the percentage of that $100k "shortfall" that the stockholders won't get.

And to a public company, that's a disaster. It means they weren't competent enough to project accurately, and it means stockholders will lose confidence in them and go spend their money elsewhere. It means lower stock prices and in the public market, the more your stock costs, the better investment you are, and falling stock prices are all investors need to tell them to take their money and run.

So, even if the company is doing fine, paying its bills, making some money and even reinvesting some in itself, if those stockholders think they're not going to make as much money off the company as the company said they would, they're going to desert that company like rats deserting a ship that's just settling a little lower in the water due to its timbers soaking up a bit more seawater than usual.

It's all artifice and lies.