Thursday, August 7, 2008

‘Flat is the New Up’

As someone who has been flitting between the professions and commercial enterprises (usually both at the same time), I have always maintained to friends and family that in privately-owned enterprises, having a flat year, where business turnover and profits are similar to the preceding year is not a bad thing at all. In fact, it's a good thing since you're still making money.

So, you can imagine the pleasure I derive from the newly-minted phrase flat is the new up. I love it!
Problem with the profit paradigm
I have always felt that the problem with the conventional wisdom of measuring corporate performance in terms of turnover growth and profit growth in the 20th century and present millenium is that it spoils the fun of doing business. Fortunately, that yardstick only applies to publicly listed corporations.
For the rest of us in small and medium sized enterprises, if things stay the same (in profit mode, of course) year-on-year, it's a happy situation.
But for large corporations that are publicly listed, zero growth in turnover and profits sends shareholders, investors, analysts and fund managers into a feeding frenzy of criticism and violent displays.
I don't want to be caught in the thicket of academic and technical issues on the need for yields and returns on investments. But, philosophically, the current growth and profit paradigm arises from the phenomenon studied by Berle and Means way back in the 1930s. This phenomenon is the separation of ownership and control of modern large corporations. For more advanced reading see Theory of the firm.
Basically, the owners of corporations, meaning, shareholders and (some say) stakeholders like employees and lenders, want to see a return on their investments, salary and wage increases and ability to repay borrowings with interest, as the case may be.
The demand and insistence on growth and profits by these groupings forces the management of corporations, who have control, to make business decisions towards making the corporation increase growth and increase profits, year-on-year.
In such a paradigm, flat growth and flat profits is a mortal sin. This explains the desperation that led to the Enron and Worldcom debacle in the 1990s. You may recall the outpouring of soul-searching and recrimination that took place, leading to earnest discussions on the need for corporate governance. But, really, corporate governance only treats the symptom. The real cause is the curse of demanding growth and increasing profits.
Flat is the new up
So, the Newsweek piece ‘Flat is the New Up’: In this economy, is that the best one can hope for? is particularly resonant, for me.
The article is a tongue-in-cheek log on the current economic challenges where, in the US, the sub-prime crisis has hit Fannie Mae, Freddie Mac and the financial sector and, it applies equally to the global phenomenon of economic malaise in the form of slowing economic growth and inflation.
Reading the article reminded me of this long-held view of mine, that flat growth and flat profits year-on-year isn't a bad thing at all. Now it would seem that this attitude may spill over from privately held small and medium sized enterprises to include all stakeholders of large publicly listed corporations. I just want to say, Welcome aboard, people!

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