Imagine the CEO of a growth company telling its shareholders, “Henceforth we will be pursuing no risky new research, acquisitions or new business ventures. We will concentrate on being stewards of our existing business and will simply pay all profits as dividends.” This is an unlikely scenario, to say the least. The reality is that markets expect growth. There is a deeply held assumption that neither a company nor its management is viable unless it is able to grow. Growth gives investors a feeling that management is doing its job. Growth is typically perceived as a proactive (rather than a defensive) strategy. Or maybe, as the Red Queen says in Lewis Carroll’s Through the Looking Glass, “Here it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
“The only way managers can deliver a return to shareholders that exceeds the market average,” Clayton Christensen and Michael Raynor wrote in The Innovator’s Solution, “is to grow faster than shareholders expect,” however irrational that may be.1 Indeed, a recent CSFB HOLT study found that 50% of the valuation of the 20 most valuable companies was based on expected cash flows from future investments.2 Nevertheless, it has become almost a national... To read the complete article, login or sign-up using the form below.
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