Showing posts with label unsuccessful enterprise. Show all posts
Showing posts with label unsuccessful enterprise. Show all posts

Monday 10 August 2009

Poor Management a Double Liability in Unprofitable Business

It is a true remark that the determining factor in keeping an unprofitable business running is often the natural desire of the management to hold on to their jobs.

Unfortunately, poor-caliber management is more anxious to hang on than high-caliber management, since the latter can usually find other and perhaps better employment elsewhere.

Thus, good management can make most businesses successful, and if the obstacles to success are insurmountable it will try to work the situation out in whatever way will yield the best results to the stockholder. *

Bad management often makes an intrinsically good business unsuccessful; it bitterly opposes any move that will hurt its own position, whether the move be in the direction of
  • improving the management,
  • selling the business at a price far above the past market value, or
  • discontinuing it altogether.
Ref: Security Analysis by Graham and Dodd

* The case history of Hamilton Woolen showed how a capable and conscientious management dealt with the problem of continuing a hitherto unsuccessful business. The question was twice put to the stockholders for a vote. In 1927, they voted to continue the business, with new policies, and the results were satisfactory for a time. In 1934, following a disastrous strike, they voted to liquidate the business and realised considerably more than its previous market value as a going concern.

Ref: Security Analysis by Graham and Dodd

The Question of Continuing the Enterprise

If a publicly owned business is consistently unsuccessful, should the stockholders move to dispose of it?

Does the answer depend mainly
  • on business judgement,
  • on ethics or
  • on custom?

We think that what usually happens in such cases is dictated mainly by custom - by the stockholders' habit of letting things drift until something happens to change the picture.

The ethical question turns on the possible obligation of the owners toward society, the employees, or the management, which may require them to continue to operate the business even though it is unprofitable. This matter has not been thought through.

Economists say that the elimination of unprofitable enterprises is an important means by which the free-enterprise system adapts its output flexibly and efficiently to the public's wants. However, while society as a whole may lose rather than gain by the continuance of unprofitable businesses, the impact of discontinuance on local communities may be disastrous and cannot be ignored.

With respect to employees, no ethical obligation seems to interfere with drastic layoffs and discharges when demand declines. Whether a concern is successful or unsuccessful, the NUMBER of employees retained on the payroll is expected to be a matter of sound business judgement, and not of ethics.

The increasing power of labour unions has tended to impose uniform wage requirements on all companies in an industry, with the result that the less favourably situated units have no flexibility of contract and therefore little chance of working out a decent return for the owners. If ethical considerations are to dictate the continuance of such enterprises, it would seem that there should be some give-and-take between stockholders and employees.

Ref: Security Analysis by Graham and Dodd