The race for corporate growth appears daily in the press.^[1] Growth seems to be a good thing. But is it really, and if so, which kind of growth is the best? There are so many lists and rankings now available, it’s really tough to choose. Fortune magazine ranks companies based on total revenues and percentage change. Business Week lists executives based on total compensation. Forbes magazine identifies the planet’s wealthiest individuals. The Wall Street Journal publishes its annual rankings of strongest and weakest stock performers. And this is just the start of some of the better known lists and rankings. In our modern society, we’re literally inundated with lists, rankings, scorecards, opinions, and data. Good analysts know that if anything, we usually have too much data (fraudulent situations aside)! Perhaps it’s no wonder that stocks have so much volatility. Even the financial experts can’t agree on how to value assets and which data to watch.

Which are the key items for investors and managers to monitor? Should you monitor assets? Revenues? Net income? Corporate net worth? How influential are CEOs to stock performance? In the past few years, we’ve read about massive, newsworthy deals. Lots of people including management, shareholders, and employees get swept up in the news and big transactions. But do these data relate to stock performance and do they create value for the company’s other stakeholders?

Just because a company or executive makes the evening news or front page of a key business periodical does not mean that this company or individual is necessarily better than any other. For example, executives making Business Week’s most highly compensated list are not necessarily more deserving or better than their peers. Perhaps these individuals were simply blessed with good timing or circumstances. Moreover, it’s quite possible that their large payday comes at the end of a relatively long, successful career and they simply saved all of their accumulated stock to the end. So what? High pay does not by itself suggest strong performance. Similarly, the fascination with gargantuan M&As does not necessarily state that these combinations are either good for the combined entity or create value for the stakeholders. In fact, they may just be newsworthy because of the size and influence of the deal in the community. They may be in the press because a lot of people will lose their jobs with the consolidation.

Informed stakeholders, including common stock shareholders and creditors, need to see through all the information releases and determine which events and behavior are good for the company and which are not. But it’s not always easy and conflicting signals abound. High executive compensation does not necessarily correspond with strong talent and high future performance. Also, strong revenue growth does not imply continued growth in revenues or profits. Such is the situation in today’s marketplace. Investors need to learn the rules as they go along. Unfortunately, some investors are now learning this lesson the hard way—after they have already lost most of their gains from the 1990s.

To be sure, investors and managers prefer some growth to the alternative of no growth. Why not? More growth is always better, isn’t it? Clearly, maintaining operations with no growth is not desirable. Rarely (except in an overall declining environment or improving margin situation) do you read about executives or shareholders boasting about an organization shrinking in size. But, extraordinary growth may not be good for investors or employees. In fact, it may be very bad. Often two large companies, such as AOL and Time Warner, come together and create a lousy combination. Political infighting, lost opportunities, redundant costs, and expensive severance packages all contribute to large inefficiencies in the short term. Thus, you are left with several conundrums. For example, growth generally is good, but high growth may not be good. Or, you may discover that no growth is bad, but high growth might be bad too. Finally, you have the possibility that no growth is bad and high growth may be good or bad.

These outcomes create difficult choices. Sometimes evaluating management decisions and internal and external reactions can be very complex. As you consider later, it is quite possible that growth should not be uniformly defined as good or bad; it just depends on the stakeholders’ relationship to the organization and the type of risk–return tradeoff in consideration. Although this simple resolution does not sweep all problems under the rug, there is a different mechanism to evaluate growth. It may not be universal in application and perfect in prediction, but it offers external parties a more accurate reading on where the company is headed. Moreover, it offers management a better yardstick to measure their true contributions.

All growth is not equally desirable to all stakeholders of the organization. For example, some managers, perhaps induced by dreams of fame and fortune, may be biased to grow the firm in size despite knowing that it does not reward other stakeholders (i.e., equity shareholders). Shareholders, on the other hand, would like to see the stock price rise irrespective of sales growth, asset growth, or individual compensation. But who decides growth and how can patterns be changed?

Much of what management does on a daily basis is not necessarily a manifestation of individual decision making or organizational renegades, but rather an extension of corporate culture. To be sure, on the margin, individuals may take advantage of opportunities within a flawed system. But the inherent gridlock in organizational processes and the narrow pursuit of basic patterns with the Concrete Middle largely reflects institutional habit and societal norms.^[2] This is a major problem that executives of large organizations acknowledge, but unfortunately cannot easily change or modify. These corporate culture habits are embedded in the organizational fiber and take years to develop. In the absence of radical change or corporate upheaval, there is little incentive or momentum to do anything different. Consequently, old rules support unimaginative, bureaucratic behavior among middle and upper management. After a while this orientation becomes detrimental to all stakeholders.

There exists a method of growth that provides superior returns to long-term shareholders. But it runs counter to the incentive clauses currently in place. It requires a new model for organizational growth that may threaten some managers who are comfortable in a bureaucratic environment. Those members who choose to follow this different method will undoubtedly sense some risk to their career. After all, they will be pursuing a brave new vision that is still being tested. But if it works, they have the potential for pushing their personal careers and organizations to new heights. Furthermore, if handled in the context of a portfolio of small investments, the risk and cost structure to the firm is actually very low. The actual costs and risk to the firm for managing new growth may even be lower than the firm’s current situation.

During the 1990s, WorldCom and MCI combined in a massive merger suggesting to shareholders that there would be strong growth in corporate assets (compared to the prior period) and improved efficiency. Yet this merger, not unlike other major mergers (such as Chrysler/Daimler), ultimately resulted in smaller combined revenues and assets in periods subsequent to the consolidation.^[3] Other companies, such as Enron and Tyco, boasted explosive sales growth using other innovative (later determined to be inappropriate) techniques. WorldCom, Enron, and Tyco demonstrate how management impropriety and manipulation pushed the company higher to meet external expectations. Unfortunately, no one can know now, and will probably never know, how many other companies were misdirected as a result of management impropriety, although investors are now becoming more vigilant in their evaluations. Ultimately, the markets discovered that the extraordinary revenue growth for WorldCom, Tyco, and Enron did not create true value for shareholders. Improper accounting entries and other inappropriate management behavior contributed to each entity’s decline. But what can be known about the incentives for different stakeholders that were built into the growth plan for each of these companies? Isn’t it possible that the incentives are similar at other companies and maybe no one there has uncovered all of the problems yet? For example, in 2002–2003 a number of firms in the financial industry were rocked by a massive $1.335 billion collective total of penalties for inappropriate business practices. Isn’t it possible that this sort of behavior also occurs at other companies that have thus far eluded detection?

There are plenty of other case scenarios, discussed later, that also did not work out for shareholders. To be sure, we are not just referring to major corporate scandal or illegal behavior. There are lots of situations in which managers and key consultants/advisors/financiers did more for themselves than for shareholders, though did nothing illegal. These individuals often have an inherent, economic bias to focus more on growth in revenues and assets than shareholder returns in the short term. Simply stated, senior executives and their advisors (especially their advisors) may be able to benefit at the expense of shareholders. These individuals receive greater annual compensation, bonuses, and fee income. However, there is no question that executives would also like to see the stock rise. Because most of their compensation ultimately rests with stock options, they have a clear incentive to promote stock growth.

But there is a timing issue that is very much in their control. If the market is hot and financing is cheap, then it becomes easy for managers to buy companies in the short term. As long as the stock price in the near term does not dip (which may happen in a hyperactive market), then even M&As about which dealmakers and decisions are uncertain (i.e., unsure whether or not they make sense in the long term) will be pursued due to short-term benefits.^[4] Further, each of the key (i.e., influential) advisors/consultants/financiers/venture capitalists generates significant fee income with the closing of a deal. Many of these people had personal incentive to complete deals—even if they knew that it might be bad for the company and many of its stakeholders long term.

Estimates suggest that as many as 5000 high-tech millionaires were created each month during the “gold-rush” days of 1999–2000. Such wealth creation was largely credited to successful IPOs or company harvests through sale. Back in 1998–2000, it was relatively easy to make big money. Soaring stock prices inflated IPO values, which were then used as currency to buy other companies at high prices. By way of example, the total dollar value of shares traded on the NASDAQ Stock Market during the first half of 2000 climbed to $10.8 trillion. This was an increase of 125% from the prior year and appreciably higher than a few years before. With this surge of wealth, many companies bought other companies pushing their collective, inflated values higher and higher. However this IPO and acquisition ploy changed in the year 2000. By 2001, over 300 dot.coms filed for bankruptcy and more were planning the same. The high-flying NASDAQ index was down over 40% (causing several trillion dollars in lost investor wealth) and both IPO and M&A transactions came to a near halt. Such was the drastic turnaround from the heady days in the late 1990s. Investors learned that money could be made quickly and could be lost just as fast. But these were special times and most participants involved in the deals knew it.

People behind the deals were savvy enough to know that they had to work fast or forever lose their once-in-a-lifetime opportunity. High growth was the “play” and acquisitions or IPOs were the vehicles of choice. Cheap financing and creative dealmakers took care of the rest. It was all about the money. Consider the following situations. In 1999, prestigious investment banking firms (i.e., Goldman Sachs, etc.) would go to Harvard Business School (among other leading graduate programs) and not fill their interview schedule. Why? Approximately 35 to 40% of the graduating class shunned the traditional career path of Wall Street and consulting (such as McKinsey or Bain) to pursue their dream in dot.com start-ups. Another 25 to 30% attempted to move into the lucrative VC or private equity markets. Yes, these were unusual years. Even experienced executives took unusual risks and strayed away from their safe career path. It actually became commonplace for executives from large companies to leave their secure, high-paying salaries in pursuit of a start-up venture. To be certain, their dream included entrepreneurial excitement, growth, recognition, opportunity, and a chance to make a difference on a winning team. Let’s not forget an important, driving factor. They also pursued money: lots of money. If our capital markets provide any insight to human behavior and motivation, then we have an extraordinary peek at opportunism and the Western World’s insatiable appetite for wealth accumulation.^[5] During the 1990s, greed was running on overdrive. Even though the level of IPO and acquisition activity is down during the period 2000–2003, we should remember that it is almost exclusively a function of poor market conditions. The conditions may have changed but the organizational systems that will allow this behavior to occur have not changed. Consequently, it is quite possible that in the absence of organization or regulatory reform, some of this behavior will someday return.

It shouldn’t be surprising that the greatest excitement in an emerging growth organization often centers on the prospect of an IPO market. From the outset, many entrepreneurs and financiers see the IPO as the ultimate harvest vehicle. Why? Newly listed companies have an established fair market value that sets an immediate, and many believe unbiased, estimate of the firm’s true value. An IPO facilitates team building and incentive alignment as well as prestige and stability of capital structure. It also provides liquidity. Whenever an equity holder wants to cash out, he just calls a broker and gets his money transferred into his brokerage account in seconds. This doesn’t happen with privately held ownership. Holders of private stock may never be able to see their stock, and even if they do sell, will probably pay high transaction costs and get a lower price than they wanted.

The mere prospect of “going public” is daunting. Of the millions of newly created ventures each year, only a handful ever makes it to the public offering stage. Financial statements need to be cleaned up, the story or “road show” needs to be prepared, and everybody involved with the deal needs to be onboard. Everybody sings the same tune, and outside investors receive a constant message. Basically, outside investors want to hear about how a unique team, with extraordinary talent and vision, will take their investment dollars and build a new empire to ever greater heights. Sometimes it works (Home Depot) and sometimes it doesn’t (eToys). Sometimes it works for a while and then later doesn’t (Boston Chicken). However, the basic approach doesn’t change—investors want growth and will quickly bid up a company’s stock if they see evidence that the story is working. Investors will also punish the stock if they discover that the story is a lie.

There are plenty of participants outside the company that help bring the company to market and facilitate the development of the story. These include corporate accountants, lawyers, investment bankers, and venture capitalists. Some of these participants get fees as a percentage of the deal size (investment bankers and financiers) some receive stock with ownership (venture capitalists). Some earn more fee income as the deal increases in size and complexity (accountants) and a few earn fee income along with stock in lieu of fees (some lawyers earned “founders stock”). Thus, as much as corporate managers want to receive a higher price upon sale, there is an equal or greater amount of pressure pushing the price higher on the outside of the company.

Those participants who support the stock price realize how fickle the markets can become once the truth emerges. Because inside owners (such as venture capitalists) are usually required to vest or hang onto their holdings for 6 to 12 months after an IPO (restricted or limited stock sales), these folks have to watch in horror with everyone else if the stock price falls precipitously shortly after going public. Although there is potentially a lot of money to be made for a successful IPO venture, there is considerable effort and risk with this approach. That is yet another reason why most deals didn’t harvest or cash out through an IPO. The vast majority of harvests occurred through a strategic sale, acquisition, or consolidation (combination with another company in a similar area). This was the primary method during the 1990s and it allowed key advisors, stakeholders, and sellers to get their cash out immediately. It was particularly attractive for those dealmakers that wanted to liquidate their holdings and transfer their funds to safer or more diversified havens before the bad news leaked out.

The short-term orientation among stakeholders is not a trivial issue. This track did not start yesterday and it will not disappear tomorrow. If anything, given the changing corporate landscape, this myopic approach is likely to get worse. Years ago, employees came to a firm and had a long-term orientation. The company was their future and individuals were very protective of their workplace and organizational assets. Nowadays, corporate employees, particularly senior executives, are likely to last only three to four years. This short-term duration changes everything. Corporate loyalty has become a thing of the past. Sure, some people still follow the corporate mantra and sacrifice for the benefit of the organization. However, this attitude becomes less likely when the people hiring inform the people interviewing that they themselves do not expect to be at the firm longer than a few more years. Should you be surprised that some executives and employees game the system for personal benefit? Moreover, if this is the approach among members within the organization, should we be surprised if members external to the company have the same attitude as well? Collectively, this can be a rather big problem for a large organization. Actually, it would be more accurate to state that it is a major problem for large companies. There are many terms used to define this issue, but the most commonly applied descriptor is “corporate culture.” Corporate culture, it seems, is the all-encompassing, universal “umbrella” adjective that quickly encapsulates all that is good or bad about a specific organization and its people. But what is it really, and can it be harnessed for useful purposes? Some of it comes from the people currently working at the firm but much of it may simply come with age and accumulated bureaucracy.

Executives of large organizations realize that the lifeblood of corporate health depends on new business initiatives and growth. But what is the best path of growth? Organic growth is not easy and it may be that management pursues acquired growth simply because it is the best way to shake up the organization and move it forward. Organizational size and age influence corporate culture and the active pursuit of opportunity. As a general rule, older companies tend to have lower levels of organic or internal growth and more mature product lines. Also, these older and larger companies tend to be less entrepreneurial. Consequently, in the absence of corporate reinvigoration or opportunity pursuit, decay will set in and corporate atrophy will occur. Perhaps this is why many Fortune 500 CEOs pursue acquired growth in such an aggressive manner. Acquired growth, although not as desirable as organic growth, may be perceived as more desirable than the alternative of no growth. Plus, acquired growth is fast. Companies can double organizational revenues or assets in a matter of a few weeks. This might take 10 or more years through internal means. For many large, older companies, they might not otherwise ever get to these milestones. Acquired growth may be the only sure growth they’ve got.

When companies acquire other companies, they usually consolidate operations and attempt to implement synergistic cost-savings and efficiencies. In simple terms, this means some redundant jobs will be eliminated and people will be fired. This leads to a vicious, self-indulging circle of events on Wall Street. Because firings improve financial statements, executives plied heavily with stock options can use this mechanism to boost stock prices and indulge Wall Street. Consequently, people get fired—lots of people. Large company mergers engender interest and popular press attention because the big companies have large layoffs. Who stays and who goes hinges on logistics, efficiency, and corporate politics.

Not surprisingly, employee morale suffers from M&A transitions, which often bring internal retaliation and sabotage in various forms, such as theft of intellectual property, malicious destruction, and spirited arguments. Calm and order within the organization may take a long time to return. Some firms never recover. Internal mistrust and perceptions of greed and exploitation offset the perceptions of improved efficiency. Continuing collaboration among parties may be strained to the point of dysfunction. At the extreme, parties unite along territorial boundaries based on the original alliance, with each sharing a common hate for the other side. Teamwork deteriorates and organizational integration fails to materialize. In essence, all that appeared positive on paper disappears in a muddle of political sniping and infighting. Growth suffers.

For many acquisitions, the simple consolidation and elimination of jobs is much easier for the accountants and the deal analysts than for the front-line managers. The anxiety and heartache for paring inefficient operations is real, and maybe even inevitable. Accomplishing the cost reduction through consolidation and subsequent divestiture generates unnecessary transaction fees benefiting only the dealmakers. Many deals look good on paper and, in actuality, should be completed. The evolution of business forces efficiency and refines the business model. Needless expenses or redundant costs should disappear. However, the manner in which cost efficiencies develop does not mandate industrial consolidation or a transfer of ownership. Indeed, a simple cross-border alliance might be all that is required.

Inevitably, some cross-border deals will occur and ownership rights will transfer from one party to the other. Leaders will emerge to drive the new organizations to higher levels. But ownership transfers need to consider the cultural differences among the different groups and the damage done from an inappropriate consolidation. Some value-added members of the team may transfer or leave during the shuffle, thus compromising the future direction of each new unit. Adding two units together and then splitting them apart comes at a cost. Prior to bringing together two different organizations, business leaders need to be able to anticipate whether the organizational conflicts representing different cultures will more than offset the benefits related to the consolidation. Future growth depends on this important assessment.

Young companies, particularly young companies in the process of going public through an IPO, generate strong excitement. All members within and outside the firm seem focused on this wealth-creating event. Management can easily rally support and push energized team members to perform beyond expectations. Personal and professional goals may never again be so perfectly aligned with a large group. An IPO provides focus and congruence to organizational goals while creating an economic harvest for its stakeholders. Even those employees who do not own a direct stake in the company’s stock get excited about a potential trickle-down effect of wealth. It is clear throughout the organization that a significant, dynamic situation will occur and that all stakeholders can benefit from success with this event. Moreover, just subsequent to the IPO, interest is piqued. The company is in the spotlight, executives appear flawless and productive, and well-groomed employees smile for the cameras. Things in Corporate America just don’t get much better than this. With the new equity infusion, management becomes blessed with new problems: how to best allocate the newfound infusion of cash.

As long as the stock continues to rise, management can feel proud of their contributions and can point to the market’s reaction as support for their actions. But over time, the company and stock may encounter dips. Along with increased volatility of the stock price, employees and management may begin to develop diverging views regarding their organizational and personal goals. Entering employees may come in with fresh energy and a naïve perspective about rising through corporate ranks to the top. Middle managers may become jaundiced by unfulfilled dreams and resentment for institutional hierarchy. Senior managers might focus on stock movements without regard to equitable allocations among other members of the organization.

Each group may expect different things from the organization and be willing to contribute different things to it. With these changing dynamics and departure from goal congruence may come the answer as to why the for-profit organization cannot sustain itself over long periods of time.^[6] Perhaps the key differential between for-profit ventures and nonprofit institutions has more to do with goal congruence among the stakeholders and less with organizational efficiency and change. Maybe large companies cannot survive long term because the institutions are filled with myopic members, each of whom seeks a different self-motivated path. Perhaps the different paths that drive members of a firm are a function of people coming into the organization from different upbringings or orientation of life. Maybe the only time when company employees really get along and agree on the organizational goals are when they first set up a company or are about to take one public. Suppose these are the reasons for institutional lethargy. What needs to change?

Organizations need to create new ventures with a new model of growth that can operate within the limiting facets of the general environment and corporate culture. True growth will depend on strong leadership to craft new solutions that motivate current and future stakeholders. Much of the outcome may be generated with appropriate incentives and clever personnel. These may come from organizational design and structure. Changing the company culture and environmental orientation is a different story. This will be near impossible to accomplish. Great leaders will either learn how to embrace and manage the culture or learn how to effectively get around it.